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Time-Varying Effects of Trade Openness and FDI on Economic Growth in Bangladesh: Evidence from a Bayesian TVP-VAR-SV Model

Keywords

Abstract

Bangladesh’s growth model is widely described as trade- and FDI-led, yet decades of empirical work assume the underlying growth elasticities of trade openness and foreign direct investment (FDI) are fixed across five decades spanning trade liberalisation, an exchange-rate float, and a compliance-cost shock to the ready-made-garment sector. This study tests that assumption using a Bayesian time-varying-parameter vector autoregression with stochastic volatility, estimated via Hamiltonian Monte Carlo with Minnesota-style shrinkage priors on annual World Bank data for Bangladesh, 1972-2024, the first application of this framework to Bangladesh’s trade-FDI-growth nexus. Neither elasticity shows statistically detectable time variation anywhere in the sample, a qualified-null result that survives a three-fold loosening of the coefficient shrinkage prior. The FDI coefficient stays positive and economically meaningful throughout but is never distinguishable from zero, while the trade-openness coefficient hugs a narrow band around zero. Stochastic volatility, by contrast, moves substantially and in economically interpretable ways, with a single data-driven structural break in 2002 rather than at the calendar dates conventionally used to date Bangladesh’s policy regimes. These findings suggest that the regime shifts long treated as watersheds for the trade-FDI-growth relationship are better understood as episodes of shifting shock variance than as changes in the elasticities themselves. For policy, this implies that expanding trade volume alone is unlikely to shift Bangladesh’s growth-transmission mechanism; diversification toward higher-value-added, more backward-linked production, alongside strong shock-absorption buffers around periods of rising trade and FDI variance, is the more promising lever.

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