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Exchange Rate Pass-Through and Inflation Dynamics

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  • Puja Rani Saha
  • Hasina Sheykh
  • Shamim Ahmed

Abstract

This paper examines the exchange rate pass-through (ERPT) and its impact on home inflation in Bangladesh, particularly in the post-pandemic era. Examining important economic factors including the nominal exchange rate (NER), money supply (M2), industrial production (IP), and global commodity index (GCI) using monthly data from January 2002 to August 2023 helps one to grasp their combined influence on consumer price inflation (CPI). By means of Johansen cointegration and Vector Error Correction Model (VECM) approaches, the study reveals important short-term and long-term dynamics. Contrary to patterns in many emerging nations, the results show that changes in exchange rates have apparently little impact on home prices. Rather, changes in the money supply and world commodities prices mostly influence inflation; the latter becomes a major factor. The study also exposes an unexpected positive link between industrial production and CPI, implying complexity in Bangladesh's production-driven economic structure. Moreover, this investigation underlines how complex monetary expansion, external commodities shocks, and devaluation of money interact to shape inflationary pressures. These results offer legislators important new perspectives and support strong monetary policies and focused involvement in world commodities markets to help to lower inflation. This study clarifies ERPT in developing countries and provides direction on inflation control techniques for Bangladesh.

Suggested Citation

  • Puja Rani Saha & Hasina Sheykh & Shamim Ahmed, 2025. "Exchange Rate Pass-Through and Inflation Dynamics," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 14(2), pages 73-85, March.
    • Handle: RePEc:rbs:ijfbss:v:14:y:2025:i:2:id:4066
    DOI: 10.20525/ijfbs.v14i2.4066
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    References listed on IDEAS

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    1. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
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    JEL classification:

    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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