This paper investigates the trends and movements of agricultural prices, industrial prices and the agricultural terms of trade in Bangladesh with annual data for the period 1952–2006. The ADF and KPSS tests results suggest that both agricultural and industrial prices have a unit root while the agricultural terms of trade is trend-stationary. These results remain unchanged if allowance is made in the unit root test for the possibility of a structural break during 1971–1975 (when Bangladesh gained independence from Pakistan and experienced economic shocks) by applying the two-step procedure of Perron (1989). A simple Nerlovian agricultural price determination model is specified within the framework of aggregate demand and aggregate supply. The Johansen cointegration test results for the periods 1953–2006 and 1973–2006 suggest that there exists a cointegral relationship between agricultural prices, industrial prices, per-capita real income and the real exchange rate between the Bangladeshi taka and the US dollar under the restriction that per-capita real income and the real exchange rate are ‘long-run forcing variables’ in the sense of Pesaran and Shin (1995), and Pesaran, Shin and Smith (1996). The paper estimates a four-variable vector error-correction (VEC) model and conducts an impulse response analysis for the post-independence period, 1973–2006.
Australian Economic Papers Vol. 47, Issue 1, p. 38-52