Bangladesh Bank Training Academy Journal

Abstract

Private sector in Bangladesh along with government plays a prominent role in economic development through production, investment and export. The purpose of this paper is to investigate the response of private domestic investment to a change of real exchange rate. Here, it is considered whether investment responds differently to real depreciations versus real appreciations. In this paper The Johansen Co-integration likelihood approach and VECM were employed to examine the long run relationship and to detect the short-run and long-run causality among the variables (Domestic investment, Real Exchange rate and real income) using annual data over 1976 to 2015. The result shows that the domestic investment is positively affected by real income and real exchange rate which is statistically significant. Result of VECM shows that domestic investment and real income reaches in equilibrium after 12.5 years and 33.33 years respectively where exchange rate is already in equilibrium. Moreover there is long-run causality among the variables and short-run causality running from real income to domestic investment but no short run causality from exchange rate to domestic investment.