Linkage between World and Domestic Prices of Rice under the regime of Agricultural Trade Liberalization in Bangladesh

The paper examines the relationship between the world market and domestic market prices of rice for Bangladesh in the regime of agricultural trade liberalization. The long run price relationship information is an important piece of information for the policy makers in formulating domestic polices and negotiating trade policies at the international level. The monthly data used for this study are taken from different sources, the Food outlook, FAO and Global Information and Early Warning System, FAO and the Bangladesh Bank for the period June 1998 to July 2007. Both Engle-Granger bi-variate and Johansen multivariate cointegration tests were used for the results sensitivity. We sequentially proceed to estimate the standard error correction model. The results showed that there is a long run equilibrium relationship between the world and the domestic prices and the relationship is uni-directional, meaning that, the domestic prices adjust to the world prices but not vice-versa. So the policy to ensure food security (via food price stability and price risk management) should be carefully designed as the movement of the world market price is higher and distorted and many consumers depend on the markets for their food, especially in the case of Bangladesh