Exchange Rate Pass - through in Export Value-chain of Bangladesh

Abstract

Determining the extent and rate of the exchange rate pass-through (ERPT) to inflation has been of utmost importance to policy-makers in developed and emerging nations. This study uses mixed techniques to examine the exchange rate pass-through in Bangladesh using a data sample that spans the years 1990 to 2020. Comparison with India and Bhutan has been made in some aspects. The results show that the ERPT is significant, asymmetric, and rapid, with prices reflecting significant amount of changes in exchange rates in short run. Policy-makers should continue aiming for low and stable inflation and establish a strong track record of prudent macroeconomic policies in order for the ERPT to drop. This study uses a panel of data to investigate the exchange rate pass-through (ERPT) connection, which is the link between the exchange rate and the prices of traded products. The results of this analysis indicate that while there is evidence of a one-to-one connection between changes in the exchange rate and export prices for primary exports, this link is not present for ready-made garment (RMG) exports. Market-specific econometric estimates show that exporters' pass-through behaviour is influenced by their perception of the demand pattern in destination markets. As a result, pricing-to-market (PTM) emerges as the dominant strategy, defying the "law of one price" hypothesis' prediction. The Multi-fiber Arrangement (MFA) system, which limited the competitive activity of several providers in many restricted commodities that are of export importance to Bangladesh, is to be made responsible for the startling results that RMG exports are insensitive to fluctuations in the currency rate.