Exchange Rate Overshooting in Bangladesh: An ARDL Approach

Md. Monir Khan

Abstract

This paper re-assesses the Dornbusch’s (1976) sticky price monetary framework of exchange rate determination by adopting ARDL bound testing approach as well as ARDL Error Correction Model (ECM) to show the long-run relationship for monthly data from January 2010 to July 2022. With the advantage of ARDL model which jumble both the I(0) and I(1) variables, we conclude that our model has long run relationship between exchange rate and macro variables which includes in this model. By using ARDL (5, 11, 12, 12, 10) model estimation based on AIC criteria, the findings of this paper shows that BDT overshoot both in short-date as well as long run and patronize the overshooting hypothesis outlined by Dornbusch in 1976. Nevertheless, this overshooting phenomenon does not occur in the present month but in one month after.

References

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[refR-3] S. D. Dutt and D. Ghosh, “An empirical note on the monetary exchange rate model,” Appl. Econ. Lett., vol. 7, no. 10, pp. 669–671, 2000, doi: 10.1080/135048500415996.DOI ↗Google Scholar ↗

[refR-4] P. Grossman, L. Niemann, S. Schmidt, and H. Walach, “Mindfulness-based stress reduction and health benefits: A meta-analysis,” J. Psychosom. Res., vol. 57, no. 1, pp. 35–43, 2004, doi: 10.1016/S0022-3999(03)00573-7.DOI ↗Google Scholar ↗

[refR-5] L. Sarno and M. P. Taylor, “Purchasing power parity and the real exchange rate,” IMF Staff Pap., vol. 49, no. 1, pp. 65–105, 2002, doi: 10.4324/9781315875606.DOI ↗Google Scholar ↗

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[refR-7] P. M. Journals, I. M. Fund, and P. M. Journals, “The Monetary Approach to the Exchange Rate : Some Empirical,” vol. 25, no. 1, pp. 48–75, 2014.Google Scholar ↗

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[refR-10] T. Miyakoshi, “The monetary approach to the exchange rate: Empirical observations from Korea,” Appl. Econ. Lett., vol. 7, no. 12, pp. 791–794, 2000, doi: 10.1080/135048500444813.DOI ↗Google Scholar ↗

[refR-11] F. Exchange et al., “On the Mark : A Theory of Floating Exchange Rates Based on Real Interest Differentials,” vol. 69, no. 4, pp. 610–622, 2014.Google Scholar ↗

[refR-12] R. Meese and K. S. ROGOFF, “51_Jie1983.Pdf.” 1983.Google Scholar ↗

[refR-13] D. E. Rapach and M. E. Wohar, “Testing the monetary model of exchange rate determination: A closer look at panels,” J. Int. Money Financ., vol. 23, no. 6, pp. 867–895, 2004, doi: 10.1016/j.jimonfin.2004.05.002.DOI ↗Google Scholar ↗

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[refR-19] M. Bikram and S. Sunpreer, Indentifying the relationship vetween cultural dimensions and consumer decision making styles, vol. 4, no. 1. 2019.Google Scholar ↗

[refR-20] E. D. Mansfield and E. Reinhardt, “International institutions and the volatility of international trade,” Int. Organ., vol. 62, no. 4, pp. 621–652, 2008, doi: 10.1017/S0020818308080223.DOI ↗Google Scholar ↗

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[refR-22] P. Alagidede and M. Ibrahim, “On the Causes and Effects of Exchange Rate Volatility on Economic Growth: Evidence from Ghana,” J. African Bus., vol. 18, no. 2, pp. 169–193, 2017, doi: 10.1080/15228916.2017.1247330DOI ↗Google Scholar ↗