This study attempts to explore the relationship between exchange rate and crude oil
price, foreign exchange reserve and trade balances in the case of Bangladesh and South
Korea based on the monthly time series data. Applying VAR and VEC Granger noncausality
tests, this paper reveals that crude oil price, foreign exchange reserve and trade
balances do not Granger cause exchange rate in the short run or in the flexible exchange
rate regime. However, in Bangladesh case, crude oil price and trade balances are
causally related with exchange rate and causality runs from oil price and trade balance to
exchange rate in the long run. Exchange rate and foreign exchange reserve have been
found not related in the case of Bangladesh but it is related for the long run data of
South Korea. In South Korean case, trade balances and crude oil price do not cause
exchange rate rather exchange rate influences trade balances. Though in the short run
similar results were found in the case of both countries irrespective of the economic
backgrounds, the long run relationship depends on the economic features of the country.
Policy implication for Bangladesh is that it should consider the oil price as well as trade
balances along with other variables during forecasting exchange rate. For Korea, it
should take into account foreign exchange reserve along with other variables in
forecasting exchange rate. It should consider exchange rate as well because it has a
substantial influence over trade balances.
