Three Essays on International Economics: Bangladesh and Beyond

<p dir="ltr">This thesis is a collection of three self-contained papers (chapters 2, 3, and 4) in international economics, focusing on exchange rate economics. The first two papers evaluate the asymmetric effects of exchange rate changes on Bangladesh’s trade performance for both the overall trade balance and for industry-level export earnings. The third paper explores the association among real exchange rates, geopolitical risks, and institutional framework for some developed and developing countries. The first paper evaluates the asymmetric effects of real exchange rate changes on the trade balance of Bangladesh, utilising panel data from 22 partner countries covering the period 1986–2019. The findings of the nonlinear autoregressive distributive lag model (NARDL) indicate that bilateral real exchange rate fluctuations have asymmetric impacts on the trade balance. Over the long run, a real depreciation improves the trade balance more significantly than the deterioration caused by a real appreciation. A partner-specific bounds testing approach also confirms the asymmetric impacts of the real exchange rate. This paper argues that the asymmetric behavior can be attributed to the nature of Bangladesh’s exports, which are price-sensitive and benefit from currency depreciation. The study disagrees with the government’s decision to keep domestic currency overvalued. As Bangladesh’s currency, the taka, is crawling-pegged against the US dollar and is likely overvalued, the study suggests that a devaluation policy or market-determined exchange rate could improve Bangladesh’s trade balance and macroeconomic stability. The second paper investigates the relationship between changes in the real exchange rate and Bangladesh’s exports, considering three standpoints: (1) apparel and textile exports, (2) asymmetries in bilateral real exchange rates and (3) the third country effect. Using fully modified ordinary least squares (FMOLS) estimation for ten major trading partners and five competing countries of Bangladesh spanning 1986–2020, the study confirms that bilateral real exchange rates have asymmetric effects on the apparel and textile industries. In both cases, real depreciation increases export earnings more than appreciation reduces them in the long run. Moreover, considering the currency appreciation of competitor countries as a third-country effect, apparel exports show greater resilience compared to textile exports. The study suggests that depreciations of exchange rates (induced by policy), diversification and quality improvement of apparel and textile products can increase Bangladesh’s export earnings and its competitiveness in the world market. The third paper explores the association among geopolitical risks, institutional framework and real exchange rates across a broad range of developed and developing countries. The findings of the study reveal that global and country-specific geopolitical risks are associated with real depreciation. At the onset of global geopolitical risk, developing countries are more than three times as likely to experience real depreciation as developed countries. In contrast, a strong institutional framework is positively associated with a real appreciation. The results suggest that a robust institutional framework can partially mitigate the weakening of domestic currencies, particularly in developing countries. Moreover, the panel vector error-correction model (VECM) analysis indicates Granger reverse causality, where real depreciation can exacerbate geopolitical risk. Since geopolitical risk and institutional framework are significantly associated with real exchange rates, policymakers should address these factors to ensure financial stability through effective economic policies.</p>