The Nexus Between Oil Price Shock and the Exchange Rate in Bangladesh

Sakib Bin Amin, Noshin Nawal Audry, Ahmed Farah Ulfat

Abstract


We examine the nexus between oil price and exchange rate for Bangladesh economy by using annual data covering from 1980 to 2018. Given the stationarity properties, the Johansen cointegration and the ARDL bounds cointegration tests find a long-run cointegrating relationship between the variables. We find that oil price granger causes exchange rate in the long-run but not in the short-run. According to DOLS and DARDL model, an increase in oil price appreciates exchange rate by 0.40% and 0.30%. We argue that the central bank's proper monitoring mechanism is necessary to avoid oil price's adverse effects on the exchange rate.

Keywords: Oil Price Shock, Real Exchange Rate (RER), Cointegration, Causality, DOLS, DARDL, Bangladesh.

JEL Classifications: C22, Q43

DOI: https://doi.org/10.32479/ijeep.10658


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