Bangladesh Bank Training Academy Journal

Abstract

The study aims to examine the equilibrium exchange rate in Bangladesh economy applying sustainable current account balance approach and behavioral equation approach during the period of 1980-81 to 2017-18. Using nominal exchange rate, current account balance, GDP and Terms of Trade data the study found that currently Bangladesh currency is overvalued compared to its equilibrium. In addition, the empirical results from the behavioral equation approach showed that the foreign aid and remittances have significant positive impacts on the real exchange rate. Besides, the study found that the investment to GDP, external sector resource and real GDP have significant negative impacts on the exchange rate. The policy implications of the findings indicate that an increase in the investment to GDP and GDP itself causes the exchange rate to appreciate while the increase in external resource balance causes depreciation of the exchange rate.