Testing the Nexus between Imported Capital Goods and Manufacturing Output in Bangladesh

Abstract Considering the increasing importance of imported capital goods in the developing economy’s manufacturing sector, our empirical study explores the relationship between imported capital goods, inflation, financial development, trade openness, and manufacturing output in Bangladesh using data from 1991 to 2022. The econometric analyses utilize the augmented ARDL (Auto-regressive Distributed Lag) model, frequency domain causality, and counterfactual analysis. The results suggest a significant connection between the import of capital goods and manufacturing output in Bangladesh in the near and long term. Specifically, a favorable long-term association exists between imported capital goods and manufacturing output. Furthermore, short-term adjustments are consistently made to uphold this association. The frequency domain causality analysis and counterfactual analysis also support the findings of the augmented ARDL approach. In addition, this study also emphasizes that inflation and trade openness adversely impact manufacturing output, while financial development positively influences manufacturing output in the economy. JEL Classification: C32, F14, F41, O14 Keywords: Augmented ARDL , Bangladesh , Imported Capital Goods , Manufacturing Output , Trade Openness