INTEREST RATE AND INFLATION DYNAMICS ON EXCHANGE RATE MOVEMENT IN BANGLADESH: AN EMPIRICAL INVESTIGATION USING ARDL APPROACH

Abstract

This paper investigates the impact of inflation and interest rates on exchange rate fluctuations in Bangladesh using the ARDL approach. The study establishes a stable and significant long-term relationship between Interest Rate (IR), Inflation (INF) and Exchange Rate (ER) in Bangladesh from 1980 to 2021. The results indicate that lending interest rates have a positive effect on Bangladeshi currency appreciation against the US dollar, while inflation has a positive but insignificant impact on the exchange rate. In the short term, the interest rate also has a significant and positive effect on the exchange rate, while inflation does not. The study recommends an efficient management of interest rates and inflation in Bangladesh to keep balance in the exchange rate. The paper emphasizes the sensitivity of the country's economic growth to changes in the exchange rate and exposes the remittance and export sector to greater vulnerability. These findings contribute significantly to the current literature on the link between interest rate, inflation, and exchange rate in developing countries like Bangladesh