Reserve Accumulation and Sterilized Intervention in the Foreign Exchange Market in Bangladesh: An Empirical analysis

The main intention of the paper is to investigate the extent of sterilization of Bangladesh Bank to offset the monetary expansionary effect of reserve accumulation in the foreign exchange market. To this end, the paper estimates a credit reaction function by applying Johansen co integration technique and Vector Error Correction (VEC) model. Monthly data has been used for the period 2003-2013. The paper finds that there exist a long run relationship between NDA and NFA which statistically significance at 10 percent level. The long run elasticity between NFA and NDA shows an extent of sterilized intervention about 11 percent in the foreign exchange market. The short run estimated coefficient and error correction of the credit reaction function from VEC model reveal that the speed of adjustment of NDA is 5.4 percent which means that NDA moves towards equilibrium by adjusting 5.4 percent in every month.