Does Asymmetric Relation Exist between Exchange Rate and Foreign Direct Investment in Bangladesh? Evidence from Nonlinear ARDL Analysis

Abstract

The study aims to investigate the pattern of relationships such as symmetric or asymmetric, between exchange rate and foreign direct investment in Bangladesh by applying Autoregressive Distributed Lagged (ARDL) and nonlinear ARDL. In this study, we employed quarterly data for the period of 1974Q1 to 2016Q4. Data were collected and aggregated from various sources namely, Bangladesh Economic Review published by Ministry of Finance and statistical yearbook published by Bangladesh Bureau of Statistics and an annual report published by Bangladesh Bank. The relationship between exchange rate and FDI inflows attract immense interest in the recent periods, especially for developing countries' perspective. The results of the study ascertain the long run relationship between FDI, exchange rate, monetary policy, and fiscal policy. Considering the asymmetric assumption, the findings from NARDL confirm the existence of a long-run asymmetric relationship in the empirical equation. In the long run, it is observed that positive change that is the appreciation of exchange rate against USD decrease FDI inflows and negative shocks results in grater inflows of FDI, however, the positive shocks produce higher intensity that negative shocks in Exchange rate. For directional causality, the coefficients of error correction term confirm long-run causality, in particular, bidirectional causality unveiled between FDI and exchange rate.