Nexus between Investment and Economic Growth of Bangladesh: Evidence from the VECM Approach

Abstract

The study looks into the relationship between investment and economic growth in Bangladesh using time series data covering 1975–2017. The unit root test, the Johansen co-integration approach, and the vector error correction methods have been used to estimate an investment function with three variables: investment, GDP, and interest rate. Each of the three variables is I(1) and co-integrated. The Vector Error Correction Model results show a long-run equilibrium in GDP, interest rate, and investment with a 15% speed of adjustment. VECM-based Granger causality demonstrates a unidirectional causality running from GDP to investment in both the short and long run. It also depicts investment in Granger as caused by interest rates in both the short and long run. To expedite the economic expansion of Bangladesh, policymakers ought to provide an atmosphere conducive to investment.