Inter-linkage Between Foreign Exchange Reserve & Inflation in Bangladesh

Abstract

Theoretically, rising Bangladesh's foreign exchange reserves, if not sterilized properly, expands the money supply, which raises the consumer price index. In this regard, there are many existing research studies demonstrate a long run relationship between foreign currency reserve and the rate of inflation. This study also tries to test this possibility in Bangladesh perspective. Time series data of consumer price index (proxy of inflation rate) and Foreign Exchange Reserve (total reserve) have been taken from the World Development Indicators, covering the period 1991-2021 for Bangladesh. After ensuring the conformity of the stationarity of the data series, the Johansen Co integration test confirms a significant positive long run association between the tested variables. Therefore, it can be said that, a rise in foreign currency reserves will result in a steady rise in price level in Bangladesh economy. This study will be useful in policy making for the government as it develops and applies monetary policy to keep Bangladesh's consumer price index stable.