Conceptual image of Bangladeshi Taka volatility during COVID-19

Decoding COVID-19's Economic Impact: How the Pandemic Shocked Bangladesh's Exchange Rate

Mira Elwood in Business & Economy August 2025 • 4 min read.

"A deep dive into the GARCH model analysis revealing how COVID-19 case numbers influenced the volatility of the Bangladeshi Taka."

The COVID-19 pandemic, which began in late December 2019, triggered widespread economic and financial instability globally. Lockdowns and restrictions drastically altered supply chains and consumer behavior, creating unforeseen pressures on financial markets. For Bangladesh, a nation heavily reliant on exports, these disruptions posed significant challenges to its economic stability, particularly concerning the exchange rate of the Bangladeshi Taka (BDT).

Understanding how external shocks like a pandemic can influence exchange rate volatility is crucial for policymakers. Exchange rate fluctuations can impact trade balances, foreign investment, and overall economic growth. In Bangladesh's context, a stable exchange rate is vital for maintaining competitiveness in international markets and ensuring steady economic performance. Therefore, examining the specific impacts of COVID-19 on BDT's exchange rate provides essential insights for future economic planning and crisis management.

This article delves into the findings of a research study that used the GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model to analyze the impact of COVID-19 case numbers on the volatility of the BDT against major currencies such as the US dollar (USD), Japanese Yen (JPY), and Swedish Krona (SEK). By exploring this model, we aim to uncover the extent to which the pandemic influenced exchange rate dynamics in Bangladesh, offering a clearer understanding of the economic challenges faced and the potential strategies for navigating similar crises in the future.

How Did COVID-19 Cases Affect Exchange Rate Volatility?

Conceptual image of Bangladeshi Taka volatility during COVID-19

The research study employed the GARCH (1,1) model, a statistical tool widely used in finance to analyze the volatility of time series data. This model is particularly suited for capturing the characteristics of financial markets where periods of high volatility tend to cluster together. The study examined daily data from March 9, 2020, to December 30, 2020, a period that encapsulates the initial outbreak and subsequent waves of the pandemic.

The core objective was to determine whether changes in the number of COVID-19 cases in Bangladesh had a significant impact on the volatility of the BDT against three major currencies: the US Dollar (USD), the Japanese Yen (JPY), and the Swedish Krona (SEK). Here's a breakdown of the key findings:

Positive Correlation: The study revealed a significant positive relationship between the number of COVID-19 cases and the volatility of the BDT exchange rate. This suggests that as the number of COVID-19 cases increased, the BDT experienced greater fluctuations in its value against the USD, JPY, and SEK.
Statistical Significance: The results were statistically significant, indicating that the observed relationship was not due to random chance but rather a genuine impact of the pandemic on exchange rate dynamics.
Model Validation: Diagnostic tests confirmed the robustness of the GARCH model, ensuring that the findings are reliable and not compromised by issues such as serial correlation or heteroscedasticity.

To gain a deeper understanding, the study divided the analyzed period into two sub-periods: the initial phase of the pandemic (Period 1) and the subsequent period when the pandemic's effects were more sustained (Period 2). This division allowed researchers to identify any structural changes in the relationship between COVID-19 cases and exchange rate volatility.

What Are the Implications for Economic Policy?

The study's findings highlight the importance of considering public health crises as significant drivers of economic instability, particularly in countries heavily integrated into the global economy. For Bangladesh, this means that policymakers need to strengthen their capacity to manage external shocks and implement strategies to mitigate the impact of future crises on the exchange rate. The results of this study provides better forecasting and can thus better help implement fiscal policies.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2403.0256,

Title: Impact Of Covid-19 On Exchange Rate Volatility Of Bangladesh: Evidence Through Garch Model

Subject: econ.gn q-fin.ec

Authors: Rizwanul Karim

Published: 04-03-2024

Everything You Need To Know

What specific currencies were analyzed in relation to the Bangladeshi Taka (BDT) exchange rate volatility during the pandemic?

The research specifically examined the volatility of the Bangladeshi Taka (BDT) against three major currencies: the US Dollar (USD), the Japanese Yen (JPY), and the Swedish Krona (SEK). The study used the GARCH model to analyze the impact of COVID-19 case numbers on the BDT's fluctuations against these currencies, providing a focused assessment of the pandemic's effects on Bangladesh's exchange rate dynamics within a global context.

What is the GARCH model, and why was it chosen for analyzing the impact of COVID-19 on the BDT's exchange rate?

The GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model is a statistical tool used to analyze the volatility of time series data, particularly in finance. It's well-suited for capturing the characteristics of financial markets where periods of high volatility often cluster together. The study chose the GARCH (1,1) model because it allows researchers to understand how the number of COVID-19 cases influenced the BDT's volatility against currencies like USD, JPY, and SEK. The model's ability to identify and quantify volatility clusters makes it an effective tool for assessing the impact of external shocks, like a pandemic, on exchange rate behavior.

How did the number of COVID-19 cases in Bangladesh affect the volatility of the Bangladeshi Taka (BDT), according to the study?

The research revealed a significant positive relationship between the number of COVID-19 cases and the volatility of the Bangladeshi Taka (BDT) exchange rate. This means that as the number of COVID-19 cases increased during the study period (March 9, 2020, to December 30, 2020), the BDT experienced greater fluctuations in its value against the US Dollar (USD), Japanese Yen (JPY), and Swedish Krona (SEK). The findings indicate that the pandemic directly contributed to increased uncertainty and instability in the BDT's exchange rate.

What are the implications of these findings for economic policy in Bangladesh?

The study's findings underscore the need for policymakers in Bangladesh to recognize public health crises as significant drivers of economic instability, especially for a country heavily integrated into the global economy. This means that strengthening the capacity to manage external shocks is crucial. Specifically, policymakers should implement strategies to mitigate the impact of future crises on the exchange rate, which involves better forecasting and the development of fiscal policies. A stable exchange rate is vital for maintaining competitiveness in international markets and ensuring steady economic performance, so these insights are essential for future economic planning and crisis management.

Why is understanding the impact of the COVID-19 pandemic on the Bangladeshi Taka (BDT) exchange rate important for Bangladesh's economy?

Understanding how the COVID-19 pandemic influenced the Bangladeshi Taka (BDT) exchange rate is vital for several reasons. Exchange rate fluctuations can significantly affect trade balances, foreign investment, and overall economic growth. For Bangladesh, a nation heavily reliant on exports, a stable exchange rate is critical for maintaining competitiveness in international markets. The insights gained from analyzing the impact of the pandemic on the BDT's exchange rate provide essential knowledge for future economic planning and crisis management, helping policymakers develop strategies to mitigate the negative effects of external shocks and ensure steady economic performance.