Workers' remittances and real exchange rate in Bangladesh : a cointegration analysis

Workers' remittances have an ever important role as one of the major sources of foreign exchange earnings for Bangladesh economy. It accounts for over 12 per cent of GDP in 2010 and having colossal socio economic implications for the country. Using Cointegation an Error Correction model, this paper attempts to contribute to the literature by investigating the effects of increasing flow of remittances on the real exchange rate of the country. Our results suggest that the influx of workers' remittances significantly appreciating the real exchange rate by lowering the relative prices of tradables to nontradables of Bangladesh compared to its major trading partners. While the fundamental variables including technological progress and improvement in terms of trade are having the similar adverse effect, openness in goods and capital market improves the international competitiveness of the country. Therefore, trade openness and nominal devaluation along with other domestic policies can be powerful policy devices to improve the external competitiveness of the country while diverting the valuable flow of remittances to the priority investment areas away from nontradable sector to avoid 'Dutch Disease' in the country.