Exchange Rate and Economic Growth Nexus: Evidence from Bangladesh

In the paper a close look at exchange rate and economic growth nexus in Bangladesh for a period of 1985-2012 using time series analysis, considering Exchange Rate, FDI, Trade Openness, and Portfolio Equity as explanatory variables and linkage with GDP. We employed Johansen-Juselius cointegration test, multivariate Granger Causality and ADF and PP stationary tests for this purpose. All the variables were found stationary after first differencing both with trend & intercept and no trend. The empirical result shows explanatory variables have significant impact on economic growth in Bangladesh. We also found unidirectional causality, exchange rate to GDP per capita, exchange rate to trade openness and trade openness to GDP per capita in short run. The accumulated response of GDP per capita to exchange rate (ER) and trade openness is positive and significant. So, policy makers in Bangladesh should pay special attention to these areas in order to support economic growth rates.