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

Terms of Trade is inextricably linked to the export performance of countries like Bangladesh that have heavily banked on their respective export sector to dictate the overall development drives. Against this backdrop, this paper empirically sheds light on the nexus between terms of trade improvement and the possible inflationary pressures associated in the context of Bangladesh, incorporating annual time series data across 1980 and 2014. This study is of paramount significance for the nation following its journey towards making a graduation to becoming a developing economy whereby the nation would no longer be eligible for the prior preferential trade treatments it previously received being a member of the least developed countries. As a result, betterment of its terms of trade can play a key role in strengthening its export competiveness and escalate its 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. Thus, these findings 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 within the economy