Finance and Development in Bangladesh

Abstract

This study evaluates the role of finance in the economic development of Bangladesh post-Cold War from 1981-2019. Using the ARDL model and Granger causality test, the findings show that gross fixed capital formation and balance of payment are positive and significant to real gross domestic product (RGDP) in the short run and long run, and a bidirectional relationship exists between them. Foreign direct investment (FDI) has a long-run and short-run negative and significant effect, while external borrowing (EXB) has a long-term positive and significant effect on RGDP. While a bidirectional causality exists between FDI and RGDP, there is no causality between EXB and RGDP. Exchange rates (EXR) have a positive and significant effect, while interest rates (INTR) were insignificant. A unidirectional causality exists between EXR and RGDP whereas no causality exists between INTR and RGDP. The findings of this study, therefore, underscore the relevance of finance in Bangladesh's economy post-Cold War and thus contribute to existing debate on the role of finance in economic development of nations.