Exchange rate dynamics and economic growth in Bangladesh: Revisiting the evidence through the real effective exchange rate

This study revisits the relationship between exchange rate dynamics and economic growth in Bangladesh, with particular emphasis on the real effective exchange rate (REER) rather than the nominal exchange rate. Using annual data from 1975 to 2024, the study examines the relationship between REER and economic growth while incorporating key macroeconomic factors, namely world gross domestic product (GDP), interest rates, money supply, and inflation. The autoregressive distributed lag (ARDL) framework bounds testing approach, and the error correction model are used to assess the long-run and short-run relationships among the variables, while the Toda–Yamamoto causality test is applied to determine the direction of causality. The results show that REER appreciation is associated with higher GDP growth in the short run but lower GDP growth in the long run. In addition, the causality analysis indicates a unidirectional relationship running from the REER to GDP growth. These findings highlight the time-sensitive role of exchange rate dynamics in shaping economic growth in Bangladesh and offer useful insights for policymakers.