Real Exchange Rate Sensitivity of Current Account Balance: Empirical Evidence from Bangladesh

Md. Azmeer Rahman Sorder, Md. Abu Jafor, Ahmad Ullah Al Mujahid, Md. Ruhul Amin, Mohammad Arjo

Abstract

This study aims to measure the real exchange rate sensitivity of the current accounts balance of Bangladesh based on yearly data from 1976 to 2020. We deploy a constructed proxy variable based on the theoretical basis to substitute for real exchange rate growth. Using Vector Error Correction Model (VECM), we find a non-significant close to zero long-run impact of real exchange rate on current accounts balance. However, the short-run impact is highly significant and positive. The analysis suggests an extremely inelastic, positive, and non-significant long-run relationship between the real exchange rate and current accounts balance. The forecasts from VECM estimates put the COVID-19 recovery by the economy within 2030. The study proposes some recommendations, including improving institutional quality, export diversification, independent monetary policy setting, and a floating exchange rate regime.

Note: Data and replication code are available.