External Reserves and Economic Growth in Bangladesh: An Empirical Analysis Using the Autoregressive Distributed Lag– Bound Testing Approach

Abstract

Purpose: This study aims to examine the effect of external reserves on economic growth in Bangladesh so that the government of Bangladesh can focus on different external reserves management policies which would benefit the economy most. Methodology: This study is based on the Autoregressive Distributed Lag - Bound test method of econometric analysis using annual time-series data from the period 1974 to 2019. Data are collected from the World Development Indicators and the International Monetary Fund databases. Findings: The study results confirm the existence of a long-run relationship between external reserves and economic growth in Bangladesh. The study findings show that foreign reserves positively impact economic growth, after controlling the influences of other factors such as trade openness, external debt and exchange rate. Practical Implications: The research findings will be a useful source of information for the government of Bangladesh to take better external reserves policy that would benefit the economy. This study will also enlarge the body of existing literature on external reserves in Bangladesh. Originality: This research expands on earlier findings which overlook incorporating the major determinants of economic growth and the ability to accumulate foreign reserves such as exchange rate, external debt and trade openness. This study also uses a long span of data and unique econometric methodology to investigate the long-run impact of foreign reserves on economic growth. Limitations: Major study limitations include a lack of previous research studies on the issue for Bangladesh and limited access for collecting data on relevant covariates.