An Assessment of Exchange Rate Policy under Floating Regime in Bangladesh

This paper examines the exchange rate policy in Bangladesh for the period 2000-2008. Regime classification of the paper suggests that Bangladesh maintained a de facto managed floating regime by intervening in the foreign exchange market on a regular basis. This is at odds with the Bangladesh Bank's claim of maintaining de jure freely floating regime since end-May 2003. A high exchange rate pass-through is observed along with high market pressure during the period of expansionary monetary policy. Given the thin foreign exchange market and high pass-through (inflation) effects, it appears difficult for Bangladesh to maintain a freely floating regime. Although Bangladesh maintained average competitiveness throughout the period with depreciating REER, the currency remained somewhat overvalued. Estimates of export demand functions suggest that with lowering the REER volatility, positive impact on overall exports rises. Moreover, net foreign assets have significant effect on the REER appreciation while terms of trade, real interest rate differential, and government budget deficit are significant to REER depreciation. Based Moreover, net foreign assets have significant effect on the REER appreciation while terms of trade, real interest rate differential, and government budget deficit are significant to REER depreciation. Based on the findings, some pragmatic policies in managing the exchange rate in Bangladesh have been suggested