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

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  • Azad, Abul Kalam

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.

Suggested Citation

  • Azad, Abul Kalam, 2016. "The impact of monetary policy on exchange rate dynamics of Bangladesh: a co integration approach," MPRA Paper 114944, University Library of Munich, Germany, revised 31 May 2016.
    • Handle: RePEc:pra:mprapa:114944
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    File URL: https://mpra.ub.uni-muenchen.de/114944/1/MPRA_paper_114942.pdf
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    References listed on IDEAS

    as
    1. Martin S. Eichenbaum & Charles L. Evans, 1992. "Some empirical evidence on the effects of monetary policy shocks on exchange rates," Working Paper Series, Macroeconomic Issues 92-32, Federal Reserve Bank of Chicago.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107.
    4. Zettelmeyer, Jeromin, 2004. "The impact of monetary policy on the exchange rate: evidence from three small open economies," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 635-652, April.
    5. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    7. Jonathan Kearns & Phil Manners, 2006. "The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    8. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary policy; exchange rate dynamics; oo-integration method; Bangladesh;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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