Abstract

Abstract

This paper examines the output and employment effects of two aggregate demand shocks, namely injections and leakage shocks, in Bangladesh. Motivated by the Keynesian injections–leakages framework in the circular flow of national income, the study estimates injection and leakage factors using Principal Component Analysis and identifies shocks in a sign-restricted structural vector autoregression over the period 1980–2023. The impulse response functions show that injection shocks raise output and employment, while leakage shocks have larger and more persistent effects over the 10 year horizon. For both shocks, the effects tend to revert to the steady-state lines over the periods, although a dominant medium-term trend is evident. Additionally, forecast error variance decomposition consistently supports the findings from impulse responses, showing that leakage shocks explain a larger portion of fluctuations in both GDP growth and employment than injection shocks. In aggregate demand-side policy management, the findings suggest that the primary drivers of macroeconomic fluctuations in Bangladesh are leakage factors. In contrast, the effectiveness of expanding aggregate demand through injections and the fiscal multiplier is subject to structural adjustments.