Estimation of Aggregate Import Demand Function for Bangladesh

Considerable debate among the researchers exists over the magnitude of the price and income elasticities of import demand and empirically it has been found to be in different ranges depending on country or region or over time. The study taken here employs cointegrating regression over some theoretically important variables to estimate income and price elasticities of import for Bangladesh over the period 1973 to 1998. The price elasticity was found –1.25 implying the vulnerability of Bangladesh import to international price movement, while the income elasticity of import was 0.45 suggesting that Bangladesh can accelerate its economic activities without risking her trade balance situation. In the recently introduced flexible exchange rate system the natural conclusion of the paper is that Bangladesh should put more emphasis on its domestic price stabilization program through monetary policy.