Research on World Agricultural Economy

Financial Development and Agricultural Gross Production Value in Bangladesh: Evidence from a Markov Regime Switching Model

Dinh Le Quoc

Faculty of Finance and Accounting, Lac Hong University, Viet Nam

Huy Nguyen Quoc

Faculty of Finance and Accounting, Lac Hong University, Viet Nam

Hai Nguyen Van

Lac Hong University

DOI: https://doi.org/10.36956/rwae.v7i1.2692

Received: 2 September 2025; Published: 19 December 2025

Abstract

Agriculture continues to serve as a fundamental pillar of Bangladesh’s economy, underpinning food security, employment, and rural welfare. Despite its importance, the sector remains highly exposed to climatic shocks and structural inefficiencies that constrain productivity. Over the past decades, financial development has expanded substantially; however, its capacity to stabilize or accelerate agricultural growth under varying economic and environmental conditions remains ambiguous. This study seeks to address this gap by examining the influence of financial development—measured by domestic credit to the private sector—on agricultural performance in Bangladesh from 1980 to 2023. To account for potential non-linearities, the analysis employs the Markov Regime Switching (MRS) model, which distinguishes between two unobserved phases of the agricultural cycle: crop-loss and prosperity regimes. The empirical results reveal that during crop-loss periods, financial development contributes positively to agricultural recovery by easing liquidity constraints and mitigating income shocks among farm households. Conversely, during prosperity phases, the effect of finance turns negative, indicating inefficiencies and debt accumulation risks associated with excessive credit expansion. These findings suggest that the finance-agriculture nexus is regime-dependent rather than uniform, underscoring the need for policy interventions that adapt to cyclical realities. Accordingly, the study advocates a counter-cyclical credit strategy—expanding credit during downturns while enhancing credit quality and efficiency during booms—to sustain agricultural growth and resilience in Bangladesh.

Keywords: Financial Development; Agricultural Growth; Domestic Credit

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