An assessment of exchange rate policy under floating regime in Bangladesh

This article analyses the exchange rate policies of Bangladesh under a ‘floating rate regime’ during the period 2000-2008. It also analyses both the behaviour of the nominal exchange rate and the real exchange rate.

To have a clear idea about the exchange rate management, this paper analyses the contemporary exchange rate policies of Bangladesh, particularly under the floating exchange rate regime. It attempts to:

• characterise the exchange rate policies Bangladesh is currently pursuing
• evaluates the appropriateness of such policies in the light of both contemporary international and domestic economic conditions
• provides some alternative policy options that might be of assistance in managing exchange rates under the floating regime. 

By analysing data from various sources including Bangladesh Bank, International Financial Statistics (IFS) and Direction of Trade (DOT) of the IMF, the paper takes into account behaviour of both the nominal and real exchange rates, behaviour of economic fundamentals, intervention activities, exchange rate market pressure, exchange rate pass through, exchange rate misalignment, impact of the real exchange rate on exports, etc.

Although Bangladesh was committed to maintaining a freely floating regime, the study finds  that its exchange rate policies were not consistent with the characteristics of a freely floating regime. According to the authors there is no alternative other than building institutions and bringing efficiency and depth to the foreign exchange market to reap the maximum benefits of the managed floating regime.