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Estimating Potential Growth for Bangladesh and the Impact of Policy Shocks on Potential Growth in Bangladesh

Bangladesh’s growth has reached slightly over 7 percent of late.  This is the second highest growth performance in South Asia after India.  This achievement has raised at least three questions: 1) Should Bangladesh’s growth accelerate further? 2) Should the country take it as a growth ceiling and try to maintain this growth rate in the immediate medium run? 3) Has the economy been overheated and that suggests cooling down growth for the country? To address these questions, the study aims to estimate potential growth for Bangladesh. The study will estimate potential growth for Bangladesh and in that exercise we shall try to overcome the limitations evident in the ADB (Rahman et al. 2013) study. The potential estimates obtained in the ADB study  is consistent with current growth level suggesting the country is performing above the potential, which strain credulity and thus warrant further investigation by looking into the limitations of data used in the study. This study, by addressing the shortcomings of data, will try to forecast potential growth over a horizon of 8 years including 8th Plan period, 2017-2025.  The study will assess the sensitivity of potential growth to change in policy by setting different values of parameters consistent with policies. The study will also investigate the impact of policy shocks on potential growth. 

In terms of methodology, the study intends to follow mainly the CBO (Congressional Budget Office of the US) and the IMF methods, which emphasizes more weights more on theory-based approaches instead of being purely statistical, for calculating potential growth for Bangladesh. The project will follow the guidelines of CBO (2001, 2004, 2014, and 2015) and Mitra et al. (2015).  Nevertheless, the study will also examine other widely used statistical and econometric methods for the robustness check on the outcome of the theory-based methodology.  

Study Team: Dr. Biru Paksha Paul and Ms. Rizwana Islam

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