Bangladesh Bank Training Academy Journal

Abstract

The major objective of this study is to explore the dynamic causal linkages between foreign capital inflows (FCI) and economic growth in Bangladesh usinga long span of time series datafrom 1981 to 2014. Though there are a lot ofpiecemealstudies dealt separately on the linkage between one or two components offoreign capital inflows and economic growth, the present study consider the joint impact of all the components of FCls (namely, official developmentassistance, overseasremittances,foreign directinvestmentandexternaldebt) on economicgrowthinBangladesh. Thoughtheearlier studiesbearsignificancethepresentstudy is an improvementof theearlier studiesin termsdatausedandmethodologicalpoint of view. Thestudy examines the time seriesproperties of the data using the widely usedADF unit root tests, which is again recheckedby thePhillips-Parron test. Theunit root testresults show that all thedataseries areofI(1) processes.Hence, weutilize theJohansen-Juseliusmultivariate cointegrationtest to examinethelongrun equilibriumrelationshipamongthevariablesin the model.Existence of a single co integrating vector was detectedand all theconsideredvariables belongto thecointegratingspaceimplying that thereis a stablelongrun relationshipamong them. The estimation of error-correction modelfurther confirms the existence of long run stable equilibrium among the variables in the modeland there is bidirectional causality all components of FCls (except official development assistance) and economic growth and there is a unidirectional causalityfrom official development assistance to economic grwoth. The resultis supportedbothby theF test(basedonGrangercausalrelationship)andalsothet test (based on error correction model). The implication of the result is that the role offoreign capital can't be ignored to achieve long run economic growth of Bangladesh. The empirical result also shows thatforeign direct investment, in thepresence of improvedhuman capital, canbemuchmorebeneficialfor the longrun growth and development of the economy.