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.

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 problem, especially in the context of bilateral modeling. The accuracy of bilateral model depends mostly on the availability of bilateral price data for export and import for the pair of countries. But the fact is that many trading countries of the world do charge discriminatory prices from their trading partners. On the other hand, bilateral price data is not available either for export or import. This poses serious challenge to bilateral modeling, especially in trade flow literature. To resolve this problem Bahmani-Oskooee and Goswami (2004) propose an alternative approach for Japan vis-à-vis its major trading partners, where we can directly estimate the bilateral inpayments in place of bilateral export and bilateral outpayments in place of bilateral imports. The major advantage of this approach is that we do not need bilateral price data to deflate bilateral value of exports or imports for retrieving the bilateral quantity of exports or imports.

The success of this type of modeling approach gives rise to other works in this area for countries like the UK and Canada vis-à-vis their respective major trading partners (Bahmani-Oskooee et al., 2005a and 2005b). These works apparently solve one problem at the cost of other major problems. The main body of bilateral modeling in the context of trade is based on Autoregressive Distributive Lag (ARDL) based approach, which can successfully estimate both the short-run and the long-run parameters of the inpayments and the outpayments under error correction and cointegration framework (Pesaran et al., 2001). Individual country level estimation, especially in the context of newly independent countries faces the major challenge of too few observations which makes it difficult for researchers to use highly sophisticated time series model estimation like ARDL. Excessive loss of degree of freedom makes it difficult to use ARDL which requires use of too many lags, their differences, etc., in the model. One prospective solution would be to address this issue by pooling data across time for all the trading countries (Goswami and Junayed, 2006, p. 515).

Applied Economics Journal, Pooled Mean Group, PMG, Bilateral Inpayments, Autoregressive Distributive Lag, ARDL, Schwarz Bayesian Criterion, Bilateral Outpayments, Consumer Price Index, CPI, Domestic Currency, Bilateral Models, Keynesian Framework, Time Series Models.