The impact of monetary policy on exchange rate dynamics of Bangladesh: a co integration approach

Azad, Abul Kalam (2016): The impact of monetary policy on exchange rate dynamics of Bangladesh: a co integration approach. Published in: The Dhaka University Studies , Vol. 71, No. 1 (1 July 2016): pp. 47-63.

Abstract

This paper estimates the impact of monetary policy on exchange rate of Bangladesh using co-integration method. Time series data are used to estimate the impact of monetary policy on exchange rate of Bangladesh. Money supply and exchange rate determination model states that money supply has positive relationship with exchange rate i.e. an expansionary monetary policy of a country depreciates its currency. The findings of this paper ensured the expected result of money supply and exchange rate determination model that broad money as a measure of monetary policy has significant positive impact on exchange rate determination. This is a common finding in the literatures of exchange rate determination. This study also shows that although broad money as a measure of monetary policy does not Granger cause official exchange rate, broad money, annual average inflation rate and current account balance Granger cause official exchange rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy; exchange rate dynamics; oo-integration method; Bangladesh
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Banerjee, A., Dolado, J.J., Galbraith, J.W. and Hendry, D., (1993). Co-integration, error correction, and the econometric analysis of non-stationary data. OUP Catalogue.

Enders, W., (2008). Applied econometric time series. John Wiley & Sons.

Eichenbaum, M. and Evans, C.L., (1993). Some empirical evidence on the effects of monetary policy shocks on exchange rates. National Bureau of Economic Research. Working Paper No. w4271.

Engle, R.F. and Granger, C.W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society, pp. 251-276.

Granger, C.W. (1988). Some recent development in a concept of causality. Journal of Econometrics, 39(1), pp.199-211.

Johansen, S., (1988). Statistical analysis of cointegration vectors. Journal of economic dynamics and control, 12(2), pp. 231-254.

Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59, pp. 1551-1580.

Júnior, J.L.R. (2013). Liquidity and exchange rates. Insper Institute of Education and Research, Insper Working Paper, WPE, 325, p. 2013.

Kearns, J. and Manners, P. (2006). The impact of monetary policy on the exchange rate: A study using intraday data. International Journal of Central Banking, 2(4), pp.157-183.

Kirchgässner, G., Wolters, J. and Hassler, U. (2012). Introduction to modern time series analysis. Springer Science & Business Media.

Krugman, P.R. and Obstfeld, M. (2009). International economics: Theory and policy, 8/E. Pearson Education India.

Meerza, S.I.A. (2012). Exchange Rate Determination of Bangladesh: A Cointegration Approach. Journal of Economic Cooperation & Development, 33(3), p. 81.

Prakash, A.B. (1999). The transmission of signals in a decentralised commodity marketing system: the case of the UK pork market (Doctoral dissertation, Imperial College London (University of London)).

Priyo, A.K.K. (2009). Impact of the exchange rate regime change on the value of Bangladesh currency. Social Science Review, 26(1), pp.185-214.

Stock, J.H. and Watson, M.W. (1988). Testing for common trends. Journal of the American statistical Association, 83(404), pp.1097-1107.

Taslim, M.A. and Chowdhury, A. (1995). Macroeconomic analysis for Australian students. Prentice Hall.

Zettelmeyer, J. (2004). The impact of monetary policy on the exchange rate: evidence from three small open economies. Journal of Monetary Economics,51(3), pp. 635-652.