Bangladesh Bank Training Academy Journal

Abstract

The intention of this paper is to examine whether Real Exchange Rate (RER) depreciation has any impact on export, import and trade balance of Bangladesh. Real exchange rate is calculated using Tk./dollar nominal exchange rate with the consumer price index of US and Bangladesh. Trade-weighted real eff ective exchange rate (REER) has also been used to examine the eff ects of depreciation on the variables. The real eff ective exchange rate is calculated by using eight (8) major trading partner countries exchange rate and the consumer price Index. The industrial production index of Bangladesh and trading partners are used as a proxy for the domestic and foreign income. Cointegration test, Vector Error Correction model (VECM), and Impulse Response Functions (IRFs) derived from the unrestricted VAR have been used to estimate the models using monthly data for the sample period from June 2003 to June, 2014. The empirical results show short-run and long-run relationship between trade balance, RR, and domestic income. An evidence of reverse L-shaped impact is observed while estimating the model with RER implying that real exchange rate depreciation is eff ective in infl uencing export, import and trade balance in Bangladesh. However, this study does not fi nd any impact of trade-weight real eff ective exchange rate on the trade balance and imports though J curve eff ect is noticed with respect to exports.