Bangladesh Bank Training Academy Journal

Abstract

This study explores the influence of the Real Effective Exchange Rate (REER) on Bangladesh's trade flows, explicitly focusing on nominal export earnings and import payments. Using a decade of monthly data from July 2010 to March 2020, the research employs the Johansen cointegration and Vector Error Correction Model (VECM); the analysis reveals a significant long-term equilibrium relationship between REER and export earnings but not with import payments. REER appreciation enhances export competitiveness in the short and long run, while import payments remain unaffected due to import substitution policies. Diagnostic tests validate the model's reliability, confirming no serial correlation or heteroscedasticity. The findings emphasize stabilizing REER, adopting REER-led strategies, and promoting export-oriented policies to reduce the trade deficit. Policymakers should utilize REER adjustments to boost competitiveness and productivity. Future research could include variables like industrial production and GDP to understand Bangladesh's trade dynamics comprehensively.