Dr.Debesh Bhowmik is presenting the following paper  in the 35^th Annual conference of Bengal Economic Association in Ramkrishna Mission Vivekananda University ,Narendrapur Campus on 22March,2015

BANGLADESH-INDIA TRADE FINANCIAL INTEGRATION LINKAGE

Dr.Debesh Bhowmik

(International Institute for Development Studies,Kolkata.Associate Editor, Arthabeekshan-the journal of Bengal Economic Association)

Key Words – trade financial integration linkage , cointegration, VAR,

JEL- C5,C32, F14,F15

Abstract

This paper seeks to explain the linkage between Bangladesh-India  trade and financial integration during the period of 1997-2014.To explore the linkage, the cointegration and VAR model have been tested between the Bangladesh-India export and Bangladesh India export GDP ratio and the indicators of financial indicators of Bangladesh viz, GDP growth rate, trade openness ,exchange rate of Rupee with US Dollar. Bangladesh’s FDI inflows and international reserves etc.The Engle and Granger(1987) test  of cointegration did  find poor linkage but the Johansen (1996) test of cointegration showed the similar results with one exception,ie, cointegration between Bangladesh’s ’s export/GDP ratio to India  with the indicators of financial indicators has only two cointegrating vectors. The above findings were tested through VAR model which showed that Impulse Response Function and variance decomposition emerged divergence including the stability tests ( Autocorrelation test, ARCH test and Normality test) of the residuals which are insignificant in both the cases of Bangladesh’s export to India  or Bangladesh’s export/GDP ratio to India .Thus poor linkage was verified which is unstable. Even the VECM showed that errors are corrected only for capital inflows insignificantly per year.  It was found because of nonconvergence of indicators of financial integration.