NEXUS BETWEEN FINANCIAL INCLUSION AND EXCHANGE RATE: EMPIRICAL EVIDENCE FROM BANGLADESH ECONOMY

Ashraful  Islam; Mohammed Ziaul  Haider

doi:10.53808/KUS.SI.2023.ICSSI74-ss

Authors

Ashraful Islam Economics Discipline, Khulna University, Khulna - 9208, Bangladesh
Mohammed Ziaul Haider Economics Discipline, Khulna University, Khulna-9208, Bangladesh

DOI:

https://doi.org/10.53808/KUS.SI.2023.ICSSI74-ss

Keywords:

Financial inclusion, Exchange rate, Foreign direct investment, Trade openness, Bangladesh economy

Abstract

Financial Inclusion (FI), defined by the engagement and involvement of people with formal financial institutions, has become a buzzword nowadays. The authors have tried to investigate an alluring problem statement considering the nexus between FI and Exchange Rate (ER). The authors have collected data from the Financial Access Survey (FAS) of the International Monetary Fund (IMF) and the World Development Indicator (WDI) of the World Bank (WB) covering the years 2004 to 2020. The study has administered Unit root test, Johanson co-integration test, Vector Error Correction Model (VECM), and Granger Causality Test (GCT) to address the study objective. In accordance with analysis results, ER and Trade Openness (TO), ER and FI, and TO and FI have bidirectional associations which expose that they cause each other, for instance, ER⟷TO, ER⟷FI, and TO⟷FI. On the other hand, Foreign Direct Investment (FDI) and TO have a unidirectional relationship which implies that FDI causes TO (FDI ⟶TO). However, the authors did not find any relationship between ER and FDI, and FI and FDI. According to the study findings, there is a positive long-term bi-directional nexus between ER and FI, which implies that both factors affect each other because of the increasing transaction demand for money over the periods. Policymakers can take financial inclusion as a phenomenon by increasing the involvement of people taking financial services from formal financial institutions for producing export-oriented and import substitution goods for earning foreign currency to maintain the trade balance as the economy remains in the trade deficit over the time period.

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