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Pooled Mean Group Estimation

of the Bilateral Inpayments


and Outpayments for Bangladesh
vis-à-vis Major Trading Partners†
Gour Gobinda Goswami * and Kazi Sabbir Ahmed **

In addressing the issue of short-run heterogeneity as well as long-run homogeneity of


the estimated coefficients in a panel framework, the Pooled Mean Group (PMG)
estimator (Pesaran et al., 1999) has gained popularity in applied research in economics
and business recently. This estimation method has been used successfully in the context
of bilateral trade balance estimation for the US with its major trading partners (Goswami
and Junayed, 2006), and in another context the bilateral exports and imports model
has been extended by modeling bilateral inpayments and outpayments separately for
Japan and its major trading partners (Bahmani-Oskooee and Goswami, 2004) by using
Autoregressive Distributed Lag (ARDL) approach to cointegration on a partner-by-partner
basis. The major limitations of these kind of bilateral models is low power and resulting
wrong sign and insignificance of the estimated coefficients due to functional
misspecification, multicollinearity as well as omitted variable bias which call for a panel
setup in the light of bilateral framework. The present paper fills this gap in the existing
literature by estimating both the equations of bilateral inpayments and outpayments
for Bangladesh vis-à-vis its 15 major trading partners for the period 1973Q3-2004Q2
using the PMG estimation. The paper reveals that the speed of adjustment measured
by the short-run error correction coefficients is lower in PMG estimation compared to
ARDL estimation. This might raise another important research question that panel
framework may provide better estimates for major parameters of the model in the long
run at the cost of allowing lower speed of adjustments in the short run.

Introduction
The main body of literature in Keynesian framework relating to export or import demand function
treats relative price and income variable as the principal determinant of export or import demand
function. This tradition took lead till early 1990s. But this conventional approach faces a major

This paper has been prepared for presentation in International Conference on Applied Economics and
Time Series Econometrics (ICAETE) at IBS-Hyderabad in collaboration with Indira Gandhi Institute of
Development Research (IGIDR) and The Indian Econometric Society (TIES) on April 17-18, 2009.

* Associate Professor and Chairman, Department of Economics, North South University, Dhaka 1213,
Bangladesh. E-mail: gour@northsouth.edu
* * Ph.D. Student, Department of Economics, Southern Illinois University at Carbondale, Illinois, USA.
E-mail: ksahmed@siu.edu

Pooled
© 2010Mean
IUP. Group Estimation
All Rights of the Bilateral Inpayments and Outpayments
Reserved. 27
for Bangladesh vis-à-vis Major Trading Partners