Abstract
This chapter analyzes the behavior of both nominal and real exchange rates of Bangladesh to assess the exchange rate management practices in Bangladesh, particularly, in the freely floating rate regime. It tries to characterize the de facto exchange rate regime. As part of explaining the behavior of nominal exchange rate, we estimate the exchange rate, market pressure and pass-through elasticities. The analysis suggests that the behavior of nominal exchange rate is not consistent with the behavior of floating exchange rate, rather it conforms to a tightly managed floating rate regime. The analysis in this chapter also points out some technical aspects of calculations of real effective exchange rate (REER) and monitoring of REER for prudent exchange rate management. Finally, this chapter provides some policy recommendations to prudently manage exchange rate under floating exchange rate regime.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Historically, Bangladesh had been maintaining various pegged exchange rate regimes, such as pegged to pound sterling (£):1972–1979; pegged to a basket of major trading partners’ currencies (£ as the intervening currency) 1980–1982; pegged to a basket of major trading partners’ currencies (US$ as the intervening currency): 1983–1999; crawling band: 2000–2003; floating exchange rate: May 30, 2003–present.
- 2.
In a recent monetary policy statement (July 19, 2009), Bangladesh Bank admitted that they purchased 1.48 billion dollar in 2008–2009 from the currency market, most of which remains unsterilized.
- 3.
The analyses and results in this section are adapted from the authors’ previous work (Hossain and Ahmed 2009).
- 4.
WPI is available only up to May 2006 with the base 1973. Here we calculate WPI considering the base period 2000 in order to make it consistent with the REER.
- 5.
Two approaches have been widely used to estimate equilibrium the REER : the fundamental equilibrium exchange rate (FEER) and the BEER . Generally two different sets of variables are used in estimating FEER and BEER (Clark and MacDonald 1999). FEER models consider variables that affect the equilibrium current and capital account balances, such as real incomes of the domestic country and the partner countries. FEER also takes into account factors affecting national savings and investment. BEER, on the other hand, puts emphasis on the variables of the macroeconomic fundamental such as TOT shocks, fiscal stance, RIRD , and so on.
- 6.
A time series is integrated of order d [usually denoted as ~I(d)]. d is the number of times the series needs to be differenced in order to become stationary.
- 7.
The presence of multiple cointegrating vectors makes it difficult to give an economic interpretation of the estimated relationships. Moreover, due to small sample size, we could not carry out the analysis with multiple cointegrating vectors.
- 8.
The Balassa-Samuelson effect can come from two sources: (1) productivity differential between the domestic tradable and non-tradable sectors and (ii) productivity growth differentials relative to trading partners.
References
ADB. (2002). Quarterly economic update (March). Dhaka: Asian Development Bank, Bangladesh Resident Office.
Baffes, J., O’Connell, S. A., & Elbadawi, I. A. (1999). Single-equation estimation of the equilibrium real exchange rate. Washington, DC: The World Bank.
Bahmani-Oskooee, M., Martin, M. A. G., & Niroomand, F. (1998). Exchange rate sensitivity of the demand for money in Spain. Applied Economics, 30(5), 607–612.
Bubula, M. A., & Ötker, M. I. (2002). The evolution of exchange rate regimes since 1990: Evidence from de facto policies (No. 2-155). International Monetary Fund.
Chowdhury, M. I., & Siddique, S. F. (2006). Exchange rate pass-through in Bangladesh (Policy Analysis Unit Working Paper Series No: WP, 607).
Clark, P. B., & MacDonald, R. (1999). Exchange rates and economic fundamentals: A methodological comparison of BEERs and FEERs. In Equilibrium exchange rates (pp. 285–322). Dordrecht: Springer.
de Brouwer, G., & Ericsson, N. R. (1995). Abstract for RDP9510: Modelling Inflation in Australia. Reserve Bank of Australia.
Eichengreen, B., Rose, A. K., & Wyplosz, C. (1996). Contagious currency crises (No. w5681). National Bureau of Economic Research. Available at https://www.nber.org/papers/w5681
Garces-Diaz, D. G. (2001). Was NAFTA behind the Mexican export Boom (1994–2000)?. Available at SSRN 261586.
Girton, L., & Roper, D. (1977). A monetary model of exchange market pressure applied to the postwar Canadian experience. The American Economic Review, 67(4), 537–548.
Grenville, S., & Gruen, D. (1999). Capital flows and exchange rates. In Capital flows and the international financial system (p. 109). Available at https://rba.gov.au/publications/confs/1999/pdf/grenville-gruen.pdf
Hausmann, R., Panizza, U., & Stein, E. (2001). Why do countries float the way they float? Journal of Development Economics, 66(2), 387–414.
Hernandez, L., & Montiel, P. J. (2003). Post-crisis exchange rate policy in five Asian countries: Filling in the “hollow middle”? Journal of the Japanese and International Economies, 17(3), 336–369.
Hossain, A. (1997). The real exchange rate, production structure, and trade balance: The case of Bangladesh. Indian Economic Review, 32, 155–177.
Hossain, M. M. A. (2002). Exchange rate responses to inflation in Bangladesh (No. 2-166). International Monetary Fund.
Hossain, M. (2009). Institutional development and the choice of exchange rate regime: A cross-country analysis. Journal of the Japanese and International Economies, 23(1), 56–70.
Hossain, M., & Ahmed, M. (2009). An assessment of exchange rate policy under floating regime in Bangladesh. The Bangladesh Development Studies, 32, 35–67.
Islam, M. A. (2003). Exchange rate policy of Bangladesh: Not floating does not mean sinking. CPD Occasional Paper series.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2–3), 231–254.
Johansen, S. (1995). Likelihood-based inference in cointegrated vector autoregressive models. Oxford: Oxford University Press on Demand.
Juselius, K. (1992). Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK. Journal of Econometrics, 53(1–3), 211–244.
Kaminsky, G. L., & Reinhart, C. M. (1999). The twin crises: The causes of banking and balance-of-payments problems. American Economic Review, 89(3), 473–500. Available at https://www.aeaweb.org/articles?id=10.1257/aer.89.3.473
Levy-Yeyati, E., & Sturzenegger, F. (2005). Classifying exchange rate regimes: Deeds vs. words. European Economic Review, 49(6), 1603–1635.
Modeste, N. C. (1981). Exchange market pressure during the 1970s in Argentina: An application of the Girton-Roper monetary model: a note. Journal of Money, Credit and Banking, 13(2), 234–240.
Montiel, P. J. (1997). Exchange rate policy and macroeconomic management in ASEAN countries. In J. Hicklin et al. (Eds.), Macroeconomic issues facing ASEAN countries. Washington, DC: IMF.
Ohno, K. (1999). Exchange rate management in developing Asia: Reassessment of the pre-crisis soft dollar zone (No. 1). ADBI Research Paper series.
Rahman, M. H., & Barua. S. (2006). Recent experiences in the foreign exchange and money markets. Policy Note 0703, published in the Bangladesh Bank Quarterly, III (4).
Rahman, A. A., & Basher, S. A. (2001). Real exchange rate behaviour and exchange rate misalignments in Bangladesh. The Bangladesh Development Studies, 27, 69–93.
Reinhart, C. M., & Rogoff, K. S. (2004). The modern history of exchange rate arrangements: A reinterpretation. The Quarterly Journal of Economics, 119(1), 1–48.
Taslim, M. A. (2003). A monetary approach to exchange market disequilibrium in Australia: 1975–97. Australian Economic Papers, 42(2), 183–196.
Younus, S., & Chowdhury, M. I. (2006). An analysis of Bangladesh’s transition to flexible exchange rate regime. Policy Analysis Unit, Research Department, Bangladesh Bank.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Appendix
Appendix
Rights and permissions
Copyright information
© 2020 The Author(s)
About this chapter
Cite this chapter
Hossain, M., Ahmed, M. (2020). Exchange Rate Management Under Floating Regime in Bangladesh: An Assessment. In: Hossain, M. (eds) Bangladesh's Macroeconomic Policy. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-15-1244-5_11
Download citation
DOI: https://doi.org/10.1007/978-981-15-1244-5_11
Published:
Publisher Name: Palgrave Macmillan, Singapore
Print ISBN: 978-981-15-1243-8
Online ISBN: 978-981-15-1244-5
eBook Packages: Economics and FinanceEconomics and Finance (R0)