Exchange Rate and Economic Growth

Abstract

This article aims to understand the effects of exchange rate movements on economic growth in Bangladesh. Using a suitable analytical framework to derive an empirical specification, we construct a real exchange rate series and employ cointegration techniques to determine the output response to Bangladeshi currency depreciations. Our results suggest that in the long run, a 10 per cent depreciation of the real exchange rate is associated with, on average, a 3.2 per cent rise in aggregate output. However, a contractionary effect is observed in the short run so that the same magnitude of real depreciation would result in about a half per cent decline in GDP. While the long-run expansionary effect of real depreciations may be appealing for considering exchange rate policy as a development strategy, the likelihood of rising inflationary pressures needs to be kept in mind while pursuing this policy option.