Corridor-specific exchange rate dynamics in Bangladesh: An ARDL analysis during Covid-19 and political transition

Abstract

This study investigates the macroeconomic determinants of the Bangladeshi Taka, quoted as BDT per foreign currency unit, against the US Dollar, Indian Rupee, and Euro using 78 monthly observations from January 2019 to June 2025, a period encompassing the COVID-19 pandemic and a major political transition. Employing a corridor-specific ARDL bounds testing approach with explicit structural break dummies, the analysis estimates short- and long-run relationships for remittances, foreign exchange reserves, consumer prices, trade balance, and domestic equity performance. Results reveal pronounced heterogeneity across corridors. Cointegration is confirmed for USD/BDT, where inflation emerges as the dominant long-run driver of depreciation, consistent with dominant currency pricing channels. In contrast, the long-run relationships for INR/BDT and EUR/BDT prove less stable over the turbulent sample period, suggesting these corridors are more susceptible to short-run shocks and regime changes that disrupted long-run equilibrium. In the INR corridor, remittances are associated with modest depreciation while reserve accumulation exerts stabilizing pressure. For EUR/BDT, inflation drives long-run depreciation, though structural instability limits the strength of the long-run evidence. The COVID-19 and transition dummies enter significantly across specifications, confirming that uncertainty amplifies exchange rate dynamics. The findings underscore the need for corridor-aware policy responses that prioritize inflation control, targeted reserve management, and remittance channel quality rather than uniform stabilization measures.