Can oil and precious metal price forecast exchange and interest rate movement in Bangladesh?

Abstract

This paper investigates the predictive power of world oil and precious metal price for exchange rate (BDT/US dollar) and interest rate movements using monthly data spanning from January 1990 to April 2016. Using a structural VAR with identification restriction, our impulse response and variance decomposition analysis suggest that oil price has a significant influence in forecasting both exchange and interest rate in short-run. Whereas, precious metal (i.e. gold and silver) price tends to display overshooting behavior on interest rate in both short and long horizons. This evidence also suggests that shocks to exchange rate account for a substantial share of fluctuations in interest rate. The findings offer major quantitative evidence for central bank policy makers, investors, hedge and portfolio managers.