Factors Influencing Exchange Rate: An Empirical Evidence from Bangladesh

Abstract

Literature effect of exchange rate fluctuations is caused by some macro-economic variables but there have not enough study in this important field. Our purpose was to generalize the main factors behind exchange rate fluctuations of Bangladesh from 1987-2017. We used ADF and PP test for stationary analysis that is unit root test satisfied preconditions for Johansen co-integrating test. Correlation matrix shows the relationships of independent variables with dependent one and agreed with FMOLS test. We find no serial correlation in Q-statistics, LM and Heteroscedasticity test. Johansen cointegration test specifies that there are no co-integrating equations for long run relationship rather the relationship is short run. VAR model and Ganger causality test shows there is a significant effect of Remittance, GDP growth and International trade to Exchange rate fluctuations because Rsquared values are more than 60%. Wald test supports the VAR model results by ensuring that there also joint effect of independent variables. Results from FMOLS test concluded that GDP growth and International trade positively affect exchange rate. Remittance has negative effect on exchange rate. Finally, we can say that rise in GDP growth and international trade, increase the exchange rate volatility but rise in Remittance reduces the exchange rate volatility. We found the relevance of this study with existing the literature in its related filed.