Exchange Rate Overshooting in Bangladesh: An ARDL Approach
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
[1] S. B. Amin, M. Murshed, and M. T. Chowdhury, “Examining the Exchange Rate Overshooting Hypothesis in Bangladesh: A Cointegration and Causality Analysis,” World J. Soc. Sci., vol. 8, no. 3, pp. 69–83, 2018, [Online]. Available: https://zantworldpress.com/wp-content/uploads/2018/10/6.-Maayesha.pdf
[2] E. Schaling and A. Kabundi, “The exchange rate, the trade balance and the J-curve effect in South Africa,” South African J. Econ. Manag. Sci., vol. 17, no. 5, pp. 601–608, 2014, doi: 10.4102/sajems.v17i5.727.
[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.
[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.
[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.
[6] P. Hooper and J. Morton, “Fluctuations in the dollar: A model of nominal and real exchange rate determination,” J. Int. Money Financ., vol. 1, no. C, pp. 39–56, 1982, doi: 10.1016/0261-5606(82)90004-3.
[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.
[8] J. A. Frenkel, K. W. Clements, and W. P. No, “Jacob A. Frenkel,” no. October, 1978.
[9] E. Rates and S. Fischer, “American Economic Association,” vol. 70, no. 5, pp. 960–971, 2014.
[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.
[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.
[12] R. Meese and K. S. ROGOFF, “51_Jie1983.Pdf.” 1983.
[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.
[14] C. Karfakis, “Exchange rate determination during hyperinflation: The case of Romanian lei,” Appl. Financ. Econ., vol. 13, no. 6, pp. 473–476, 2003, doi: 10.1080/0960310022000020870.
[15] K. Rogoff, “Dornbusch’s Overshooting Model After Twenty-Five Years,” IMF Working Papers, vol. 02, no. 39. p. 1, 2002. doi: 10.5089/9781451845846.001.
[16] D. E. Rapach and M. E. Wohar, “Testing the monetary model of exchange rate determination: New evidence from a century of data,” J. Int. Econ., vol. 58, no. 2, pp. 359–385, 2002, doi: 10.1016/S0022-1996(01)00170-2.
[17] I. Forecasting, “Why is it so difficult to outperform the random walk in exchange rate forecasting?,” Appl. Econ., vol. 45, no. 23, pp. 3340–3346, 2013, doi: 10.1080/00036846.2012.709605.
[18] S. Bin Amin and M. Murshed, “An Empirical Investigation Of Foreign Aid And Dutch Disease In Bangladesh,” J. Dev. Areas, vol. 52, no. 2, pp. 169–182, 2018, doi: 10.1353/jda.2018.0029.
[19] M. Bikram and S. Sunpreer, Indentifying the relationship vetween cultural dimensions and consumer decision making styles, vol. 4, no. 1. 2019.
[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.
[21] X. Gabaix et al., “INTERNATIONAL LIQUIDITY AND EXCHANGE RATE DYNAMICS * I . Introduction We provide a theory of exchange rate determination based on capital flows in imperfect financial markets . In our model , ex- change rates are governed by financial forces because globa,” Q. J. Econ., no. February, pp. 1369–1420, 2015, doi: 10.1093/qje/qjv016.Advance.
[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: 10.1080/15228916.2017.1247330
[2] E. Schaling and A. Kabundi, “The exchange rate, the trade balance and the J-curve effect in South Africa,” South African J. Econ. Manag. Sci., vol. 17, no. 5, pp. 601–608, 2014, doi: 10.4102/sajems.v17i5.727.
[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.
[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.
[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.
[6] P. Hooper and J. Morton, “Fluctuations in the dollar: A model of nominal and real exchange rate determination,” J. Int. Money Financ., vol. 1, no. C, pp. 39–56, 1982, doi: 10.1016/0261-5606(82)90004-3.
[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.
[8] J. A. Frenkel, K. W. Clements, and W. P. No, “Jacob A. Frenkel,” no. October, 1978.
[9] E. Rates and S. Fischer, “American Economic Association,” vol. 70, no. 5, pp. 960–971, 2014.
[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.
[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.
[12] R. Meese and K. S. ROGOFF, “51_Jie1983.Pdf.” 1983.
[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.
[14] C. Karfakis, “Exchange rate determination during hyperinflation: The case of Romanian lei,” Appl. Financ. Econ., vol. 13, no. 6, pp. 473–476, 2003, doi: 10.1080/0960310022000020870.
[15] K. Rogoff, “Dornbusch’s Overshooting Model After Twenty-Five Years,” IMF Working Papers, vol. 02, no. 39. p. 1, 2002. doi: 10.5089/9781451845846.001.
[16] D. E. Rapach and M. E. Wohar, “Testing the monetary model of exchange rate determination: New evidence from a century of data,” J. Int. Econ., vol. 58, no. 2, pp. 359–385, 2002, doi: 10.1016/S0022-1996(01)00170-2.
[17] I. Forecasting, “Why is it so difficult to outperform the random walk in exchange rate forecasting?,” Appl. Econ., vol. 45, no. 23, pp. 3340–3346, 2013, doi: 10.1080/00036846.2012.709605.
[18] S. Bin Amin and M. Murshed, “An Empirical Investigation Of Foreign Aid And Dutch Disease In Bangladesh,” J. Dev. Areas, vol. 52, no. 2, pp. 169–182, 2018, doi: 10.1353/jda.2018.0029.
[19] M. Bikram and S. Sunpreer, Indentifying the relationship vetween cultural dimensions and consumer decision making styles, vol. 4, no. 1. 2019.
[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.
[21] X. Gabaix et al., “INTERNATIONAL LIQUIDITY AND EXCHANGE RATE DYNAMICS * I . Introduction We provide a theory of exchange rate determination based on capital flows in imperfect financial markets . In our model , ex- change rates are governed by financial forces because globa,” Q. J. Econ., no. February, pp. 1369–1420, 2015, doi: 10.1093/qje/qjv016.Advance.
[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: 10.1080/15228916.2017.1247330
Authors
[1]
“Exchange Rate Overshooting in Bangladesh: An ARDL Approach”, Soc. sci. humanities j., vol. 7, no. 6, pp. 3098–3108, Jul. 2023, Accessed: Nov. 21, 2024. [Online]. Available: https://sshjournal.com/index.php/sshj/article/view/854
This work is licensed under a Creative Commons Attribution 4.0 International License.