CHAPTER-01

1.1: Introduction
The exchange rate plays an imperative role in the country's international trade. The exchange rate
is an important macroeconomic variable used as a parameter to determine international
competitiveness and indicates the global position of the country's economy. The development of
the country is closely related to its currency system. The exchange rate system consists of a set of
rules, arrangements and institutions under which nations make payments to each other. The
exchange rate of a country's currency is the value of its money for international trade in goods,
services, and finance. Therefore, it is an integral part of the monetary condition of a country.
Therefore, the central authorities, being the monetary authorities, have been given discretionary
powers under the relevant statutes to manage the exchange rate as part of their monetary,
financial and economic development policies. From a macroeconomic perspective, exchange rate
policy is essential in mobilizing foreign capital and savings, closing the domestic resource gap
and expanding investment. Various public opinions are often expressed on how central banks
should manage the exchange rate and what factors should be taken into account.Changes in
exchange rates will have both favorable and unfavorable impacts on economic activities and the
standard of living of the public due to the largely globalized trade and finance that involve
currency exchange. In general, the appreciation of a country's currency will have the following
effects, while depreciation will have the opposite effects:

• Lower the domestic prices of imports because the cost of imports in national currency will
be lower due to the higher value of the national currency. As a result, inflation will be lower,
depending on the magnitude of imports in domestic production and consumption activities.

• The equivalent in national currency of the country's outstanding external debt will be less
and, therefore, the burden on the payment of the external debt will be less.

• An unfavorable effect will be that lower import prices will encourage imports and worsen
the country's trade balance (net position between exports and imports).

• Another unfavorable effect will be that exporters are discouraged by the reduction in their
income in national currency, which will negatively affect exporting industries. However, if
domestic inflation is lower due to lower import prices, there will be higher external demand
for exports, which will offset the initial reduction in exporters' earnings.

According to Jhigan (2005), the variables that influence the exchange rate include exports,
imports, and the country's structural influences. If the country's exports exceed imports, the
demand for its currency increases and consequently has a positive impact on the exchange rate.
On the other hand, if imports exceed exports, the desire for foreign exchange increases and,

1
therefore, the exchange rate of that country rises. Undoubtedly, any measure that tends to
increase the volume of exports more than the import rate will definitely raise the value of the
national currency against other foreign currencies. The key factor of the work is the evaluation of
the exchange rate on the fundamental macroeconomic indicators of the economy. Four main
factors have been identified to measure the impact on the exchange rate, namely, exports, worker
remittances, imports, and foreign exchange reserves. Since the exchange rate plays an important
role in the development of the country's economy, the study has been carried out in this area.

1.2 Origin of the Report

Today, education is not just limited to books and classrooms. In today's world, education is the
tool to understand the real world and apply knowledge for the betterment of society and
companies. In today's world, only academic education does not make a student perfect to be
competitive with the outside world. A perfect consideration between theory and practice is
important in the context of the modern business world. The project document is very necessary
to gain ideas, knowledge and experience. From this program, the student has the opportunity to
learn to face the real business world. This report is a project document prepared as a requirement
for the completion of the MBA Program, Department of Finance and Banking, University of
Barisal

1.3 Rationality of the Study

The purpose of this document is to get a basic idea about the most important macroeconomic
factors affecting the exchange rate in Bangladesh. The exchange rate is a broad term and
throughout this report I have tried to analyze some crucial issues in this regard. The exchange
rate is playing an important role in enhancing banking and economic growth and, in turn, helping
economic development.

1.4 Objective of the Report

The main objective of the project document is to formalize me with the real market situation and
help me learn how bookish concepts are used in the real market. Therefore, since the beginning
of the study, I have done my best to carry out my project work with a view to achieving some
specific goals and acquiring related information. The key objectives of this study are:

 Know the important determinants when considering the exchange rate.

 Analyze the effect of the current account balance on the exchange rate.
 Analyze the effect of import and export on the exchange rate.
 Analyze the effect of national income and the total exchange reserve on the exchange
rate.
 Determine the effect of the exchange rate on economic growth.

2
1.5 Scope of the Report
While studying in the Finance and Banking Department, I had the opportunity to learn basic
concepts about the exchange rate. This report will cover the details of the current position of the
exchange rate in Bangladesh. I will try to focus on the different types of exchange rates and will
evaluate the effect of various macroeconomic factors.

1.6 Limitations of the Report

At the beginning of this report some obstacles have been found, which can be termed as the
limitation of the project, these reasons did not allow this report to delve into the problems, so
various parts of the report are not concentrated. The main problem that he faced in preparing the
document was the insufficiency and unavailability of the required data.

 Inconsistent: The data from different sources was quite inconsistent, which caused
some problems when reporting.
 Time limitation: Time limitation was one of the most important factors that
shortened the present study. Due to time constraints, many aspects could not be
discussed in the present study.
 Insufficient data: it was very difficult to collect data from various sources.
 Lack of records: There are not enough books, publications, facts and figures. These
limitations reduced the scope of an accurate analysis.

1.7 Sources of Data:

This report is based on secondary source of information. For theoretical development of this
paper, data have been collected from the various sources like different publications, library
sources, books, articles, etc.

The secondary sources are –

 Research reports related to it, Bangladesh Bank, Bangladesh Bureau of Statistics,

 Export promotion Bureau, Different literatures on exchange rate
 Journals related to this project papers

1.8 Data Analysis and report writing:

Collected data were analyzed and presented in the form of bar design. Different types of software
like STATA-14.2 Software, Ms-Excel, and Ms-Word etc. are used to prepare accordingly in the
form of word format.

3
 CHAPTER -2

2.1 Literature review

The literature review examined few studies in the area of exchange rate movement. A foreign
currency exchange rate, or simply exchange rate, is the price of a country's currency in units of
another currency or commodity (usually gold or silver). The country's basic policy variables are
the foreign exchange rate that ensured trade, business, long-term financing, foreign direct
investment, inflation, foreign exchange reserves, internal remittances, etc.

BaakMehmood and Vixathep (2002) show that the increase in exports has a negative impact on
the exchange rate both in the long and short term.

Gotour (1985) studied that there is an insignificant relationship between the exchange rate and
the volume of trade, but he also argues that there must be an indirect relationship. Risk-averse
companies are a major factor in exchange rate volatility to produce goods and export.

Kemal (2006) has studied that exchange rate volatility is positively related to imports and
negatively to exports in the case of Bangladesh. He has also concluded that the devaluation is
also balancing the trade deficit.

Simon (1997) found that the exchange rate and the current account have a direct and positive
relationship with inflation and that both the exchange rate and the current account are the key
factors that seriously affect small economies.

Akhtar and Hilton (1984) showed that there is a negative relationship between the vitality of the
exchange rate and the volume of foreign trade.

Harberger (2003) studied the impact of remittances on the exchange rate. He found that there is a
systematic connection between remittances and the exchange rate.

Due and Sen (2006) examine the interactions between the current account balance and the
exchange rate. This study includes the level of capital flows, flow volatility, fiscal and monetary
policy indicators and the current account surplus of the Indian economy for the period 1993Q2 to
2004Q1. The estimates indicate that the variables are integrated and each Granger causes the
exchange rate.

Moccero (2006) have conducted an investigation to understand the link between real exchange
rate volatility and export, evident from Argentina. From the finding, it is shown that there are
negative relationships between those variables. Simply put, when the exchange rate drops, export
volatility will be high. On the other hand, the real exchange rate and exports in the find showed a
significant correlation. Volatility of these variables impacts the value of sales in other countries.

4
Roubini (2000) stated that the economic phenomenon could be influenced by changes in
macroeconomic variables. Changes in the economic phenomenon will also lead to the movement
of the exchange rate internally. The main macroeconomic variable such as gross national income
will lead to changes in exchange rate movement

Vidyavathi (2016) evaluated the main macroeconomic indicators that influenced the exchange
rate. They observed a negative relationship between current account and exchange rate balance,
exchange and export rate, reserve rate and exchange rate, and a positive relationship between
remittances and exchange rate, import and exchange rate, gross national income and exchange
rate.

Wan Mohdyasee, et al., (2016), compared the ratio of exports, imports and current account
balance to the exchange rate of certain ASEAN countries. They noted that exports played a
significant role in the exchange rate movement.

Rogoff (1998) considered exchange rate uncertainty to be a major problem for exporters and
importers. Most investors do not run the risk of change rather than many risks that already exist.
For this trader's export goods to avoid the risk of exchange rate volatility.

Aydinet., Al. (2004) estimates the export supply and import demand of the Turkish economy
using a single equation and vector regression framework. The study indicated that the exchange
rate is mainly affected by imports and national income. The analysis reveals that imports and the
trade deficit are the significant determinants of the exchange rate.

Khera, K (2015), noted the effect of several macroeconomic factors influencing the post-
globalization exchange rate. The study suggested condensing imports and promoting exports.

Kasif (2000), the total foreign reserve and the exchange rate have a positive and significant
correlation between the US dollar and Bangladeshi taka.

Mirchandani, A. (2013), analyzed various macroeconomic variables that lead to exchange rate
variation. The various factors included inflation; It was observed that the GNI, current account
balance and variation of these factors correlate with exchange rate variation.

Azid (2005) has shown that exchange rate volatility and economic growth are positively affected
if there are flexible arrangements for exchange rate policies.

Lal and Lowinger, 2002; Many Asian developing countries, due to their inability to maintain
fixed exchange rates, were led to greater macroeconomic imbalances before the Asian currency
crisis in 1997. Exchange rate movements affect the current account by an appreciation of the
national currency, where the value of the national currency increases in relation to the foreign
currency, which increases the reduction in demand for national goods by domestic and foreign
consumers, as domestic goods become more expensive. As a result, the level of exports to
foreign countries falls, while imports rise, leading to a current account deficit, while a
depreciation of the national currency has the opposite effect by making domestic goods cheaper

5
than foreigners, generating a current account surplus.Because more goods are exported than
imported (Krugman&Obstfeld, 2009). Exchange rate fluctuations have a considerable impact on
a country due to these factors; it is explained by the Marshall-Lerner condition and the J curve

Although the literature on the exchange rate is getting richer very rapidly, so far there has not
been a comprehensive study on the macroeconomic factors affecting the exchange rate in
Bangladesh. This study is dedicated to filling this gap and also to proposing some suggestions for
further development of an investigation on exchange rate movements in the country. In 2019, a
Canadian researcher carried out a research work on the factors that determine the exchange rate
of the country and that motivated me to work on this issue in the context of our country. In recent
years, most of the researcher works with independent variables such as interest rate, inflation
rate, GDP, imports, exports, but I take some variables that are also important to determine the
exchange rate such as national income, remittances, and total currencies reservation.

2.2 Research Gap

Although the literature on exchange rate is becoming rich very fast, so far, no comprehensive
study has been undertaken regarding the macroeconomics factors affecting the exchange rate in
Bangladesh. The present study is devoted to fulfill this gap and also to propose some suggestions
for further development a research on exchange rate movements in the country. In 2019, a
Canadian researcher did research work on that the factors determining the exchange rate of the
country and I am motivated to work on that issue in our country's context. In recent years most
of the researcher works with the independent variables such as interest rate, inflation rate, GDP,
imports, exports, but I take some variables that are also important to determining exchange rate
such as national income, remittance, total foreign exchange reserve.

6
 CHAPTER -3
Research design & Methodology

3.1 Research Hypothesis

H0:Macroeconomic factors have no significant relationship with exchange rate in Bangladesh.
H1: Macroeconomic factors have significant relationship with exchange rate in Bangladesh.

3.2 Conceptual Framework

Dependent variable Independent variables

 Exchange rate  Gross national income (GNI)
 Current account balance
(CAB)
 Import
 Export
 Remittance
 Total foreign reserve

3.3 Methodology of the study

The objective of this study was to study the macroeconomic factors affecting the exchange rate
in Bangladesh. Time-series data used here which covers the period of 1999-2018. The period
covered is solely based on data availability, and the data have been obtained from the
Bangladesh Bank, Bangladesh Bureau of Statistics, Export promotion Bureau, Different
literatures on exchange rate. The dependent variable was exchange rate and the independent
variables were Gross National Income, Capital Account Balance, Export, Import, Remittance
and Reserve. In this study the dependent and independent variable used is in amount (million Us
dollar) order to improve its interpretability, and consequentiality to the statistical analysis. The
study was also analyzed using multivariate regression model. Dataanalysiswasdoneusingthe
STATA 14.2software.

3.4 Model development and specification

SYMBOL VARIABLES
Y1 Exchange Rate
X1 Gross national income(per capita)
X2 Current account balance

7
X3 Import
X4 Export
X5 Remittance
X6 Total foreign exchange reserve
€ Error term

VARIABLES
 Exchange Rate: -An exchange rate is the value of one nation's currency versus the
currency of another nation or economic zone. For example, how many takas does it take
to buy one U.S. dollars?
 Gross national income (per capita):-GNI per capita (formerly GNP per capita) is the
gross national income, converted to U.S. dollars using the World Bank Atlas method,
divided by the midyear population.
 Current account balance: -The current account is a country's trade balance plus net
income and direct payments. The trade balance is a country's imports and exports of
goods and services. The current account also measures international transfers of capital.
 Import: -An import is a good or service bought in one country that was produced in
another. Imports and exports are the components of international trade. If the value of a
country's imports exceeds the value of its exports, the country has a negative balance of
trade (BOT), also known as a trade deficit.
 Export: - An export in international trade is a good or service produced in one country
that is sold into another country. The seller of such goods and services is an exporter; the
foreign buyer is an importer. Export of goods often requires the involvement of
customer’s authorities.
 Remittance:-Remittance is a transfer of money, often by a foreign worker to an
individual in their home country. Money sent home by migrants competes with
international aid as one of the largest financial inflows to developing countries.
 Foreign exchange reserve: - Foreign exchange reserves are assets held on reserve by a
central bank in foreign currencies. These reserves are used to back liabilities and
influence monetary policy. It includes any foreign money held by a central bank, such as
the U.S. Federal Reserve Bank.

3.5: Regression model

Y1=α+β1X1(GNI)+β2X2(CAB)+β3X3(Import)+β4X4(Export)+β5X5(Remittance)+β6X6
(Reserve)+€

8
 CHAPTER-04
ANALYSIS AND RESULTS

4.1 Descriptive analysis

Summarize the Exchange Rate, GNI, CAB, Export, Import, Remittance and Reserve:
Variable Obs. Mean Std. Dev. Min Max
Exchange Rate 20 68.029 10.92705 48.06 83.5
GNI (per capita) 20 825 397.9751 420 1750
CAB 20 970768.2 917116.1 131637.6 3556126
Export 20 177521.12 11693.89 5312.8 39253.6
Import 20 21758.86 12287.52 7205.3 38213.6
Remittance 20 8264.306 5363.457 1705.74 15967.1
Reserve 20 6727.35 4701.139 1307 14028
Table 01: Descriptive analysis

From the table above, we can conclude that the result from descriptive analysis on this study has
shown the dependent variables which is Exchange Rate mean is 68.029 with min 48.06 and max
83.5. The standard deviation for Exchange Rate is 10.92705 which is lower than the mean. The
independent variable consists of GNI, CAB, Export, Import, Remittance and Reserve show the
number of mean 825,970768.2, 177521.12, 21758.86, 8264.306 and6 727.35 respectively. The
result for standard deviation for independent variables have shown as 397.9751, 917116.1,
11693.89, 12287.52, 5363.457 and 4701.139.There is high volatility among exchange rate in
case of CAB (917116.1).On the other hand, low volatility among exchange rate in case of GNI
(397.9751).

4.2 Testing for Stationary

Time-series data are often assumed to be non-stationary and thus it is necessary to perform a
pretest to ensure there is a stationary relationship among variables in order to avoid the problem
of spurious regression. To do so, this study adopted the Augmented Dickey – Fuller ADF) test
and PP test (Phillips-Perron test unit root) for testing the Stationary of the time series data. The
ADF test and PP test statistic outcome of the time series data for the period, 1999 – 2018 shows
that all-time series data are stationary at first difference at 5% level of significance. See table 2,3
and 4 below:
Results of ADF Test without 1st difference

Variables ADF
Test 1% 5% 10% P-value
Statistics
Exchange Rate -1.244 -3.750 -3.000 -2.630 0.000
GNI (per capita) 10.901 -3.750 -3.000 -2.630 1.000

9
 CAB -3.168 -3.750 -3.000 -2.630 0.027
Export 2.306 -3.750 -3.000 -2.630 0.999
Import -0.204 -3.750 -3.000 -2.630 0.938
Remittance 0.358 -3.750 -3.000 -2.630 0.979
Reserve 0.428 -3.750 -3.000 -2.630 0.982
Table 02: ADF Test without 1st difference

The ADF test without 1st difference shows that Exchange Rate and Current account balance P-
values are less than 5% that means data are stationary.
Results of ADF Test with 1st difference

Variables ADF
Test 1% 5% 10% P-value
Statistics
Reserve -3.387 -3.750 -3.000 -2.630 0.011
Table 03: ADF Test with 1st difference

Where Reserve time series data have become stationary after 1st difference at 5% level of
significance.

Results of ADF Test with 2nd difference

Variables ADF
Test 1% 5% 10% P-value
Statistics
GNI (per capita) -2.887 -3.750 -3.000 -2.630 0.046
Export -6.172 -3.750 -3.000 -2.630 0.000
Import -4.289 -3.750 -3.000 -2.630 0.000
Remittance -5.417 -3.750 -3.000 -2.630 0.000
Table 04: ADF Test with 2nd difference

Where Gross National Income, Export, Import and Remittance time series data have
becomestationary after 2nd difference at 5% level of significance.

4.3 Phillips-Perron test unit root

The PP test also shows the same result. See the below tables 5, 6 and 7:

Results of PP Test without 1st difference

Variables Phillips-Perron test unit root

Test 1% 5% 10% P-value
Statistics
Exchange Rate -1.289 -3.750 -3.000 -2.630 0.000
GNI (per capita) 9.556 -3.750 -3.000 -2.630 1.000
CAB -3.093 -3.750 -3.000 -2.630 0.027

10
Export 1.916 -3.750 -3.000 -2.630 0.998
Import -0.147 -3.750 -3.000 -2.630 0.944
Remittance 0.201 -3.750 -3.000 -2.630 0.972
Reserve 0.379 -3.750 -3.000 -2.630 0.980
Table 05: PP Test without 1st difference

Results of PP Test with 1st difference

Variables Phillips-Perron test unit root
Test 1% 5% 10% P-value
Statistics
Reserve -3.333 -3.750 -3.000 -2.630 0.011
Table 06: PP Test with 1st difference

Results of PP Test with 2nd difference

Variables Phillips-Perron test unit root
Test 1% 5% 10% P-value
Statistics
GNI (per capita) -2.887 -3.750 -3.000 -2.630 0.046
Export -6.440 -3.750 -3.000 -2.630 0.000
Import -4.304 -3.750 -3.000 -2.630 0.000
Remittance -5.979 -3.750 -3.000 -2.630 0.000
Table 07: PP Test with 2nd difference

This implies that, all the time series data taken from year 1999-2018 are stationary. This means
the data are time dependent and does not contain unit root.

4.4 Testing for Co-integration

Any equilibrium relationship among a set of variable implies that their stochastic trends must be
linked. We seek to determine whether there exists long-run equilibrium relationship among the
variables of the study. In doing so, the Johansen co-integration test was used. This test identifies
the number of long-run relationship that exists among the sets of integrated variables. The trace
statistic tests the null hypothesis that there are at most co-integrated equations. Therefore, a
rejection of the null hypothesis means that there are more than r co-integrating relationships.

11
 Trend: constant Number of observation=19
Lags=1 Sample: 1999-2018
Hypothesized LL Eigen value Trace Statistics 5% Critical
Value
No. of CE
None -1049.1234 284.7116 124.24
At -999.14076 0.99481 184.7464 94.15
most 1
At most 2 -961.00309 0.98195 108.4710 68.52
At most 3 -932.25432 0.95150 50.9735 47.21
At most 4 -920.56119 0.70796 27.5872 29.68
At most 5 -914.72405 0.45905 15.9129 15.41
At most 6 -909.61948 0.41569 5.7038 3.76
At most 7 -906.76758 0.25933
Table 08: Johansen test for co-integration

Hypothesized LL Eigen value Max Statistic 5% Critical

Value
No. of CE
None -1049.1234 99.9652 45.28
At most 1 -999.14076 0.99481 76.2753 39.37
At most 2 -961.00309 0.98195 57.4975 33.46
At most 3 -932.25432 0.95150 23.3863 27.07
At most 4 -920.56119 0.70796 11.6743 20.97
At most 5 -914.72405 0.45905 10.2091 14.07
At most 6 -909.61948 0.41569 5.7038 3.76
At most 7 -906.76758 0.25933
Table 09: Johansen test for co-integration

From 8 and 9, the trace statistic of 284.7116 and 184.7464 clearly exceed the critical values of
124.24 and 94.15 respectively at 5 percent confidence interval, hence, we are not accepting the
null hypothesis and conclude that there is at least one co-integrating relationship and therefore, a
long run equilibrium relationship exists among the variables. The Eigen value test also supported
this claim of long run equilibrium relationship among the variables. The maximum Eigen value
statistics of 99.9652 exceed the critical values of 45.28 at 95 percent confidence level, thus, we
are not accepting the null hypothesis of no co-integrating relationships among the variables.

12
4.5 Tests for Multicollinearity:
Variance Inflation Factors (VIFs)

Variables VIF 1/VIF

GNI (per capita) 14.250 0.070175
CAB 12.31 0.0812347
Export 13.826 0.072237
Import 8.698 0.114968
Remittance 8.613 0.116135
Reserve 1.43 0.699627
Mean VIF 9.8545
Table 10: Variance Inflation Factors

According to the Variance Inflation Factors (VIFs), it can be concluding that multicollinearity
does not exist among the independent variables sample. The centered VIF of these variables are
lesser than 10, therefore, there is no multicollinearity effects among independent variables
(GNI, CAB, Export, Import, Remittance and Reserve).

3.6 Correlations Analysis:

Exchange GNI CAB Export Import Remittance Reserve
Rate
Exchange 1.0000
Rate
GNI(per. 0.8765 1.0000
capita)
CAB 0.3751 0.1289 1.0000
Export 0.9077 0.9827 0.1441 1.0000
Import 0.9380 0.9271 0.2377 0.9673 1.0000
Remittance 0.9366 0.9526 0.2385 0.9806 0.9873 1.0000
Reserve 0.9199 0.9537 0.2223 0.9727 0.9893 0.9881 1.0000
Table: 11 Correlations Analysis

Comment: This table shows the relationship between dependent variables which Exchange Rate
and the independent variable, such as Gross National Income, Capital Account Balance, Export,
Import, Remittance and Reserve.The Pearson correlation coefficient for Exchange Rate and
Gross National Income show 1% significant value with a coefficient at 0.8765. It is represented
that the Capital Account Balance, Export, Import, Remittance and Reserve has a positive linear
correlation with Exchange Rate. Import has strong positive relationship with the dependent
variable Exchange Rate. Capital Account Balance has low positive relationship with the
dependent variable Exchange Rate.

13
4.7 Regression Analysis
The regression results reveal that Gross National Income, Capital Account Balance, Export,
Import, Remittance and Reserve as explanatory variables have explained the variations in
Exchange Rate of Bangladesh.

Regression Analysis

Variable Coefficient S.E t-value P-value

Exchange Rate 37.79281 .0762342 5.14 0.000
GNI (per capita) .0277404 .0190518 1.46 0.046
CAB -.001606 -.0010606 1.59 0.027
Export -.0009585 .0008862 -1.08 0.000
Import .0016864 .0007948 2.12 0.000
Remittance .0013906 .0014067 0.99 0.000
Reserve -.0037836 .0020334 -1.86 0.011
𝑅2 0.9280
𝑅2 Adjusted 0.8948
F (3,16) 27.94 Prob.>F 0.0000
Dependent Variable (Exchange Rate)
Table: 12 Regression Analysis

Exchange Rate=37.79281+.0277404 GNI -.001606 CAB -.00095854 Export + .0016864 Import

+ .0013906 Remittance -.0037836 Reserve.

Table 12 shows that if Gross National Income increased one unit, Exchange Rate is increased
0.0277404units. Again if Capital Account Balance is increased one unit, Exchange Rate is
decreased0.001606unit. Again if Export is increased one unit, Exchange Rate is
decreased0.0009585unit. If Import is increased one unit, Exchange Rate is increased
0.0016864unit.Again if Remittance is increased one unit, Exchange Rate is increased
0.0013906unit and if Reserve is increased one unit, Exchange Rate is decreased 0.0037836unit
This implies that all independent variable like as Gross National Income, import, Remittance has
increased this in turn will have a positive significant impact on Exchange Rate. However, the
result shows that Gross National Income, Import, Remittance is statistically significant to
Bangladeshi Exchange Rate at 5% level of significance. That means that our null hypothesis is
rejected. Export, reserve, current account balance will have a negative impact on exchange rate.
On the other hand, Capital Account balances highly significant to Bangladeshi Exchange Rate at
5% level of significance. That means that our null hypothesis is rejected, that implies reserve has
significant impact on Exchange Rate.

14
4.8 ANOVA Test:

Source SS Df MS F value Sig.

Model 2105.35526 6 350.892544
Residual 163.253319 13 12.5579476 27.94 0.000
Total 2268.60858 19 119.400452
Table 13: ANOVA Test

The F-test is used to determine whether a significant relationship exists between dependent
variable and the set of all independent variables. F-test is referred to the test of overall
significance.

In this ANOVA model, the hypothesis for the F-test involves the parameters of the regression
models:
Ho (Null Hypothesis): There is no relationship between dependent and independent variables.

H1 (Alternative Hypothesis): There is a relationship between dependent and independent

variables.

Significance of aptitude test: At a significance level of .05 any independent variable having a
significant level around .05 will regard as significant. So in our aptitude test, significance level of
0.000 is significant.

Significance of overall model: At a significant level of .05, the overall model will be significant
if the F ratio is large enough and the significance level is around .05. In our test the F ratio is
27.94 which is large enough to describe the overall test and the significance level is 0.000 which
is less than .05. So we can conclude that the overall relationship is significant.

Here we accept alternative hypothesis. Thus there is a relationship between Exchange Rate as
dependent variable, and Gross National Income, Capital Account Balance, Export, Import,
Remittance and Reserve as independent variables.

15
 CHAPTER-05
5.1 Findings

 Here we reject null hypothesis. Thus there is a relationship between Exchange Rate as
dependent variable, and Gross National Income, Capital Account Balance, Export, Import,
Remittance and Reserve as independent variables. Import has strong positive relationship
with the dependent variable Exchange Rate.

 The independent variables of the study such as Gross National Income, Capital Account
Balance, Export, Import, Remittance and Reserve have significant effect on the dependent
variable- exchange rate.

 As per my results, there is a negative relationship between exchange rates and current
account balance because when current account balance increases by 1 per cent, exchange
rate will depreciate by.001606per cent.

 According to my output, when gross national income increases exchange rates will also
increase. When gross national income increases by 1 per cent, exchange rate will appreciate
by .0277404per cent.

 If worker remittances increase, exchange rate should appreciate. When remittance increases
by 1 per cent, exchange rate will appreciate by .0013906per cent.

 As per my results, there is a negative relationship between exchange rates and export
amount. When export increases by 1 per cent, exchange rate will depreciate by.0009585per
cent.

 According to the analytical result, there is a positive relationship between import and the
exchange rates. When import increases by 1 per cent, exchange rate will appreciate by
.0016864per cent.

 As per my results, there is a negative relationship between exchange rates and total foreign
exchange reserve because whentotal foreign exchange reserve increases by 1 per cent,
exchange rate will depreciate by.0037836per cent.

16
5.2 Conclusion and Recommendations

This paper examines themacroeconomics factors that affect exchange rate fluctuations in
Bangladesh. According to the empirical results, there is a positive relationship between net
foreign purchases and the exchange rate. This study finds that the terms of trade is a determinant
of the nominal exchange rate in Bangladesh. The present study revealed that import is the most
important factor that bring volatility in exchange rate in the country as it contributes more to
variations in exchange rate. The results further indicate that due to more import we need more
foreign currency. Import has a positive effect on exchange rate as when import increases the
demand for foreign currency. For this reason the exchange rate increases. So the Government
needs to reduce the amount of imports items. The result further shows that second important
variable which bring more variation in exchange rate is reserve.If the amount of reserve
increases the demand for the foreign currency decrease. As a result the exchange rate
decreases.Export is another important factor that is effective reducing exchange rate.
Government needs pay attention to increase national production and increase our export.Based
on these evidences it is clear that in Bangladesh fiscal and monetary policies play important role
in exchange rate variation. Not only those variables but also GDP, Inflection Rate, Interest Rate,
GNP have some effect on foreign exchange rate volatility.

17
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Appendix

1. Summarize exchange rate GNI CAB Export Import remittance reserve

Variable Obs Mean Std. Dev. Min Max

Exchange Rate 20 68.029 10.92705 48.06 83.5
GNI 20 825 397.9751 420 1750
CAB 20 970768.2 917116.1 131637.6 3556126
Export 20 17751.12 11693.89 5312.8 39253.6
Import 20 21758.86 12287.52 7205.3 38213.6
Remittance 20 8264.306 5363.457 1705.74 15967.1
Reserve 20 6727.35 4701.139 1307 14028

2. Regress Exchange RateGNI CAB Export Import RemittanceReserve

Source SS df MS
Model 2105.35526 6 350.892544
Residual 163.253319 13 12.5579476
Total 2268.60858 19 119.400452

Number of obs = 20
F(6, 13) = 27.94
Prob> F = 0.0000
R-squared = 0.9280
Adj R-squared = 0.8948
Root MSE = 3.5437

Exchange Rate Coef. Std. Err. T P>|t| [95% Conf. Interval]

GNI .0277404 .0190518 1.46 0.169 -.0134184 .0688993
CAB -.001606 -.0010606 1.59 0.027 -.0060907 -.0039706
Export -.0009585 .0008862 -1.08 0.299 -.0028731 .0009561
Import .0016864 .0007948 2.12 0.054 -.0000307 .0034035
Remittance .0013906 .0014067 0.99 0.341 -.0016485 .0044297
Reserve -.0037836 .0020334 -1.86 0.086 -.0081765 .0006093
_cons 37.79281 7.351749 5.14 0.000 21.91032 53.6753

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3. VIF
Variable VIF 1/VIF
Export 14.250 0.070175
Import 12.31 0.0812347
Reserve 13.826 0.072327
GNI 8.698 0.114968
Remittance 8.613 0.1161035
CAB 1.43 0.699627
Mean VIF 9.8545

4. CorrExchangeRate GNI CAB Export Import Remittance Reserve(obs=20)

Exchange Rate GNI CAB ExportImportRemittance Reserve
ExchangeRate 1.0000
GNI 0.8765 1.0000
CAB 0.3751 0.1289 1.0000
Export 0.9077 0.9827 0.1441 1.0000
Import 0.9380 0.9271 0.2377 0.9673 1.0000
Remittance 0.9366 0.9526 0.2385 0.9806 0.9873 1.0000
Reserve 0.9199 0.9537 0.2223 0.9727 0.9893 0.9881 1.0000

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