Financial Development, Exchange Rate fluctuation and Remittances inflows in Bangladesh: A Co-integration study

Abstract

This paper attempts to explore among financial development, exports, imports, FDI, remittances and exchange rate in Bangladesh over a period of 1990 to 2020 using time series analysis. The Johansen-Juselius procedure is applied to test the co-integration relation between variables followed by the Granger Causality test and Impulse response function. To check the robustness of the study DOLS model is also applied. The empirical results documented a strong long-run co-integration relationship between exchange rate and the explanatory variables. The Granger Causality test reveals bidirectional causality exchange rate to financial development, exchange rate to FDI and financial development to FDI. Whereas, unidirectional causality found among the variables of exchange rate to imports, exchange rate to remittances, financial development to exports, exports to FDI, exports to imports, remittances to exports, financial development to imports, remittances to financial development, remittances to FDI and remittances to imports in the short run. The impulse response function shows shock on exchange rate has significant negative impact on exports, imports and remittances inflows of the country. We conclude that Bangladesh should formulate export and remittances-led polices and ensure higher degree of financial development to enhance her economic growth rates at large.