Bangladesh Bank Training Academy Journal

Abstract

This paper converses a primary element responsible for exchange rate movements of the US dollar against the Bangladeshi Taka. The dynamic effects of real and nominal shocks are scrutinized through conducting a structural vector autoregression (SVAR) model of real and nominal exchange rates with the assumption of the long-run neutrality restriction of nominal shocks on real exchange rate. In order to identify how these factors influence exchange rate variations, this approach allows us to decompose exchange rate movements into two components, real and nominal factors. This empirical analysis demonstrates the effect of a real shock on the real and nominal exchange rate is of a persistent nature, resulting in a long-run real appreciation and the effect of a nominal shock on the nominal exchange rate demonstrates that nominal shock takes around five months to maintain negative direction (depreciation) in the nominal exchange rate in Bangladesh.