Impact of Foreign Reserve in Economic Growth: An Empirical Study on Bangladesh

Abstract

Bangladesh maintained its robust performance in development. There have been upbeat exports and remittances. Overall inflation is slow & the current account deficit was reduced by higher exports and lower import inflation, but the decrease in the financial account surplus diluted the effect of the decline in the current account deficit on the overall balance of payments deficit. In the context of the Error Correction Process, this research studied the impact of economic development on Bangladesh foreign reserve assets using data for the period 1980- 2014. The findings show that economic growth is extremely important. The model's estimate, that economic growth and foreign reserves have a positive long-term relationship. The model checked by error correction estimates for error correction is negative and statistically important. In addition, the model showed that economic growth has short-term relationship too. The adjustment speed is more than 60 percent, suggesting that the term for error correction corrects the imbalance of the previous year. Granger causality test confirm that there is long run & short run causality among the variables. The question is whether the accumulation of foreign currency reserves is a required prerequisite for economic development. The empirical findings in this paper indicate that the rise in foreign exchange reserves induces GDP growth, although causality has not been demonstrated in the opposite direction.

Keywords:Bangladesh; Economic Growth; Foreign Reserve, Error correction model; International reserves.

DOI: 10.7176/EJBM/13-8-09

Publication date: April 30^th 2021