An Empirical Assessment of the Nexus between Terms of Trade and Inflation in Bangladesh

Abstract

Terms of Trade is inextricably linked to the export performance of countries like Bangladesh that have heavily banked on their respective export sector. This paper empirically examines the nexus between terms of trade improvement and possible inflationary pressures associated using annual time series data over 1980 to 2014. This study is especially important in the context of LDC graduation of Bangladesh and loss of preferential market treatment in important markets. As a result, better terms of trade can play a key role in strengthening export competiveness and raising export volumes. In light of the estimated results in this study, an inverted-U shaped non-linear association between terms of trade improvement and inflation is unearthed. The finding can be a starting point for Bangladesh to adopt relevant export- boosting policies via terms of trade enhancement without the fear of triggering inflationary pressures.