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A Dynamic Relationship Between Financial Development and Import Demand for Bangladesh: An Evidence from Combine Cointegration and Granger Causality approach

Ahad, Muhammad (2016): A Dynamic Relationship Between Financial Development and Import Demand for Bangladesh: An Evidence from Combine Cointegration and Granger Causality approach. Forthcoming in: Global Business Review , Vol. 19, No. 4 (July 2018)

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Abstract

This paper has estimated the impact of financial development on import demand over the period of 1986: Q1-2014: Q4 in case of Bangladesh. The long run relationship between financial development, import demand and economic growth are investigated by combine cointegration. Error Correction Method (ECM) is applied to examine short run phenomena. The unit root properties of variables are tested by ADF and P-P unit root test. Perron, (1997) single structural break unit root test is also applied. The results of Bayer and Hanck, (2013) combine cointegration test reveal the existence of long run relationship between import demand, financial development and economic growth. Financial development and economic growth have a positive and significant impact on import demand in long run as well as in short run. The Lagged value of error correction mechanism (ECMt-1) is -0.08 that is negative and significant. This indicates that change from equilibrium level of import demand is corrected by 8 percent per quarter in a year. The results of VECM Granger causality explain that bidirectional causality exists between import demand and financial development in long run as well as short run. Similarly, bidirectional causality exists between import demand and economic growth in short run. Policy makers should focus on financial sector development for import of technology through adopting the import substitution policy.

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