Factors Influencing Purchasing Power Parity (PPP) in Bangladesh Economy

Abstract

This paper has investigated the effect of inflation, CPI and GDP on real exchange rate. The main purpose of this paper is to find out that how much selected macroeconomic variables influencing real exchange rate in Bangladesh in 1986-2017. Firstly, the paper showed descriptive statistic. This paper tested ADF unit root for showing whether panel data is stationary or not. By testing Johansen Test for co-integration paper has shown the relationship between real exchange rate with Gross Domestic Product (GDP), Consumer Price Index (CPI) and inflation rate. The results showed that in Bangladesh Purchasing Power Parity (PPP) did not hold and there had negative relationship among those variables. For measuring the stability of the model ECM, CUSUM and CUSUMQ tests have been applied. The results showed that the model was stable during 1986-2017. So at the end of this study, it is appeared that the trend of this model will continue in the next following years in Bangladesh. Purchasing Power Parity (PPP) didn’t hold and real exchange rate is highly influenced by selected macroeconomic variables.