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

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.