Macroeconomic Determinants of Economic Growth in Bangladesh: An Empirical Analysis

Abstract

This study explores the macroeconomic determinants of economic growth in Bangladesh by examining the dynamic interrelationships among key variables, including budget deficit, interest rate, inflation rate, exchange rate, investment rate, labor force growth, and GDP growth. Using annual time-series data from 1980 to 2024, the analysis employs advanced econometric techniques such as the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, ARDL bounds testing for cointegration, the Error Correction Model (ECM), and Granger causality tests. The findings confirm a stable long-run equilibrium relationship with a significant speed of adjustment, indicated by a negative and highly significant error correction term. Investment rate and exchange rate emerged as the most influential drivers of GDP growth in both the short and long run. Specifically, 1% depreciation in the exchange rate reduces GDP growth by 0.062% in the short run and 0.056% in the long run, while a 1% increase in investment boosts GDP growth by 0.41% and 0.37%, respectively. Surprisingly, labor force growth exhibits a negative impact on GDP growth, suggesting issues such as underemployment, low productivity, and skill mismatch. Interest rate shows a mixed effect where positively impacting GDP growth in the short run but exerting a marginally negative influence in the long run. Inflation and budget deficit are found to have no significant direct impact on GDP growth. Budget deficit has no significant impact on GDP growth but higher GDP growth inspires to increase the budget deficit. The model demonstrates strong diagnostic properties with no serial correlation, heteroscedasticity, or specification error, residual is normally distributed and explains 62% of the variation in GDP growth. Maintaining exchange rate stability, promoting productive investment, enhancing labor productivity, and implementing structural reforms to support sustained and inclusive economic growth in Bangladesh.

Keywords: Budget Deficit, Exchange Rate, Labor Force Growth Rate, GDP Growth Rate, Autoregressive Distributed Lag Model, Inclusive Economic Growth.

DOI: 10.7176/EJBM/18-8-09

Publication date: August 30^th 2026