Year of Award

2024

Document Type

Thesis

Degree Type

Master of Arts (MA)

Degree Name

Economics

Department or School/College

Department of Economics

Committee Chair

Jeff Bookwalter

Commitee Members

Douglas Dalenberg, Robert Sonora

Keywords

Exchange rate pass through, ARDL, Error correction model

Subject Categories

Macroeconomics

Abstract

Assessing the impact of exchange rate pass-through (ERPT) on inflation is a crucial concern for policymakers in both developed and developing economies. The study evaluates both short- and long-term pass-through effects, shedding light on the relationships between the exchange rate movements and inflation rates in Bangladesh. In this regard, this paper applies an Auto Regressive Distributed Lag (ARDL) model and Engle and Granger cointegration test with Error Correction Modeling (ECM) to estimate ERPT in Bangladesh based on monthly data spanning 2010 to 2023 to provide a more robust and rigorous investigation of the long-run and short-run pass-through of exchange rates. In the ARDL model, the relationship between the exchange rate and consumer price index for all categories show no statistically significant relationship, except ARDL with controls shows clothing and ARDL year-to-year (y-y) analysis shows all and food items are significant. However, the lagged values of dependent variables and the lagged exchange rate are mostly found statistically significant across all six CPI categories in four different model specifications. Global oil price is statistically significant for only clothing, recreation and miscellaneous items. Additionally, during periods characterized by floating exchange rate regimes, Industrial production gap showed no significance in the models, clothing prices only are positively significant in y-y, indicating an interconnectedness between economic activity and consumer prices. CPI has notably increased for food, clothing, recreation, and furniture items in both q-q and y-y as impact of exchange rate regime changes. Exchange rate policy fixed effect found significant in y-y analysis model. The Engle-Granger cointegration tests provide evidence of a long-run relationship between exchange rates and CPI, indicating an adjustment process toward equilibrium. The error correction model confirms the short-term impact of the exchange rate on CPI, with approximately 1.5 percent of disequilibrium corrected in each period. Given the complexity of the results, this study emphasizes the need for further research to explore the intricacies of ERPT and its implications for monetary policy and economic stability in Bangladesh.

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