The Causal Relationship between FDI and Trade Balance of Bangladesh

This paper examines the relationship between net capital inflows (FDI) and the trade balance of Bangladesh, for the period of 1972 to 2011. The first question asks whether the cyclical volatility in trade balance can be explained by the volatility of capital inflows. The second question addresses the causal link between net capital inflows and international trade imbalances. The results indicate that FDI and trade balance (Exp_Imp) are cointegrated and there is a unidirectional causality from FDI to trade balance. Using the granger causality Wald test there is evidence in the data that FDI does affect the trade balance of Bangladesh in the long run. In contrast, no long run causality, in the Granger sense, was found in the opposite direction.