Causal Relationship between Government Size and Trade Openness in Bangladesh: An Empirical Analysis

Abstract

Causal association between trade openness and government size has
gained interest of researchers and policy makers all around the world. These two
crucial macroeconomic variables are of utmost importance when it comes to
attainment of economic growth via the channel of globalization. This paper
examines the cointegration and causal relationship between trade openness and
government size in Bangladesh economy using annual data from 1980 to 2013. We
consider a multivariate model and perform the Augmented Dickey Fuller (ADF) and
Phillips Perron (PP) tests to check if the variables are stationary. Next, we apply the
Johansen cointegration method followed by the Granger causality test to check for
robustness of the relationship among the variables. Our results reveal that there is a
unidirectional causality running from trade openness to government size in
Bangladesh which provides support to the compensation hypothesis for Bangladesh
economy.