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

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.