INFLATIONARY DYNAMICS OF EXCHANGE RATE MOVEMENTS OF BANGLADESHI TAKA: COINTEGRATION AND VECTOR ERROR CORRECTION ANALYSIS

This paper addresses inflationary dynamics of exchange rate movements of Bangladeshi taka in a multivariate setting. The author finds evidence of cointegration among the time series variables and hence vector error correction models are estimated to explore the short-run behavior under the postulated relationship. Causality and dynamic simulations are done to visualize the interactions among the variables. The study finds that currency depreciation is inflationary in the context of Bangladesh in the long run. The policy response that arises from the analysis is that monetary authority of Bangladesh should take care in devaluing currency as devaluation stimulates an inflationary impulse that reverberates throughout the economy.