1 FACTORS AFFECTING THE FLUCTUATION IN EXCHANGE RATE OF THE BANGLADESH: A CO-INTEGRATION APPROACH Kazi Mohammed Kamal Uddin 1 , G. M. Azmal Ali Quaosar 2 , Dulal Chandra Nandi 3 1 PhD candidate, School of Economics, Huazhong University of Science and Technology, Wuhan, China (Assistant Professor, Department of Economics, Comilla University, Comilla, Bangladesh) 2 Assistant Professor, Department of Management Studies, Comilla University, Comilla, Bangladesh 3 Assistant Professor, Department of Statistics, Comilla University, Comilla, Bangladesh E-mail: quaosar.cou@gmail.com, nandidulalchandra@yahoo.com ABSTRACT This paper adopts an econometric analysis of determinants of exchange rate for US Dollar in terms of Bangladeshi currency within the framework of monetary approach. Monthly data from January 1984 to April 2012 for Bangladesh relative to USA have been used to examine the long run and short run behavior of BDT/USD exchange rate. The paper finds that real exchange rate and the macroeconomic variables affecting real exchange rate forms a cointrigrating vector. Its observes that stock of money and increase in debt service burden results in a real depreciation of currency, while increasing foreign exchange reserve results in a real appreciation of currency. Moreover, Political instability has a significant negative effect on the value of domestic currency. Introduction Bangladesh is said to be a country with great potentials. Though many consider it over burdened with huge population, many other consider this population as asset. Talking the positive aspects, this population can easily contribute’s economic growth(rahman et al,2006).Talking about the negative aspects, this population requires a huge amount of daily necessities that may not be possible for Bangladesh to produce and thus they fare bound to go for foreign trade. Consequently, Bangladesh falls in victim of irrational exchange rate .Exchange rate, in its simplest sense can be defined as the ratio in which one country’s monetary val ue is converted to others. It is known that the higher the exchange rate, the poorer will be the condition of the importing country and vice versa. In such a case, there is no doubt to say that exchange rate has a direct impact on the economic growth of any country(rizzo,1998).In the perspective of Bangladesh, there are a large number of factors held responsible for increased exchange rate. The exchange rate is defined as the domestic price of a unit of foreign currency. The behavior of exchange rate is one of the unsolved issues of research to be dealt with. For the gigantic significance of the exchange rate in an economy, no person can refute the importance to understand the foreign exchange markets behavior .So it is very important to study about the determinants of exchange rate as well as foreign exchange markets behavior in details. The Monetary Approach which was developed in early 1970’s is very important tool to explain the exchange rate variation .this paper focus on some questions solution like: What should be equilibrium exchange rate ? How exchange rate determined? Which factors determined the exchange rate? Estimation and forecasting of exchange rate poses substantial theoretical and experimental challenge. Changes in exchange rate have pervasive effects, with consequences for prices, wages, interest rates, production levels, and employment opportunities. Fluctuations in the value of currencies of different economies have increased after the collapse of Bretton Woods System. Especially short term