Modeling Macroeconomic Interdependencies Among GDP, Inflation, Exchange Rate, International Trade, and Foreign Aid: An Empirical Evidence from Bangladesh

Abstract

This study examines the dynamic relationships among Bangladesh’s key macroeconomic variables—GDP, inflation, exchange rate, international trade, and foreign aid—over the period 1980–2024. The main objective is to assess both short-run and long-run interactions among these variables and to identify the direction of influence using Granger causality. Secondary annual time-series data were obtained from the Bangladesh Bureau of Statistics (BBS), Bangladesh Bank (BB), and the World Development Indicators (WDI). The analysis employs a Vector Autoregressive (VAR) framework, complemented by the Augmented Dickey–Fuller (ADF) test for stationarity, Johansen co-integration tests for long-run relationships, and a Vector Error Correction Model (VECM) to capture short-run adjustments toward equilibrium. Impulse response functions and variance decomposition are used to evaluate how shocks in inflation, exchange rate, trade, and foreign aid affect GDP. The results confirm one co-integrating relationship among the variables, indicating long-run equilibrium. Inflation, exchange rate, and foreign aid exhibit negative long-run effects on GDP, while international trade has a positive impact. Granger causality reveals unidirectional causality from trade to GDP and additional causal links involving inflation, trade, and aid. The study underscores the importance of stabilizing macroeconomic fundamentals, promoting trade, and strategically using foreign aid to support sustainable economic growth in Bangladesh.