Exchange Rate Policy Bangladesh

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BIDS-PRP WORKING PAPER SERIES

Exchange Rate Policy under Floating Regime in Bangladesh
An Assessment and Strategic Policy Options

Working Paper No. 2

Monzur Hossain * Mansur Ahmed∗∗

October, 2009

* Research Fellow, Bangladesh Institute of Development Studies (BIDS) ∗∗

Research Associate, Bangladesh Institute of Development Studies (BIDS)

BIDS-PRP WORKING PAPER SERIES Working Paper No. 2

EXCHANGE RATE POLICY UNDER FLOATING REGIME IN BANGLADESH:  AN ASSESSMENT AND STRATEGIC POLICY OPTIONS   © BIDS-PRP, 2009

Published by

BIDS-PRP The Bangladesh Institute of Development Studies E-17, Agargaon, Sher-e-Bangla Nagar G.P.O. Box No. 3854, Dhaka-1207, Bangladesh Phone: 9112829, 9143441-8, FAX: 880-2-8113023 Website: www.prpbd-bd.org E-mail: prp.bids@gmail.com Series Editor Dr. K. A. S. Murshid

With support from

Manusher Jonno Foundation 

Price:

Tk. 125.00

ii

Table of Contents

List of Abbreviations and Acronyms......................................................................................... Acknowledgment........................................................................................................................ Executive Summary................................................................................................................... I. Introduction.........................................................................................................................

iv v vi 1 3 5 8 10 13 15 18 23 26 28 29 32

II. Literature Review: Exchange Rate Policies of Bangladesh................................................ III. Exchange Rate Management in Bangladesh (2000-2008)................................................ IV. De facto Regime Classification for Bangladesh .…….………………............................ V. Exchange Market Pressure................................................................................................

VI. Exchange Rate Pass-through…………………………….............................................. VII. Behaviour of the REER and NEER.................................................................................. VIII. Equilibrium REER and Misalignment ……………………………................................. IX. REER Volatility and Trade Performance........................................................................... X. Policy Recommendations.………………………………………...................................... XI. Concluding Remarks ......................................................................................................... References.................................................................................................................................. Appendix....................................................................................................................................

iii

List of Abbreviations and Acronyms
ADB ADF AIC BIDS BEER CPI DOT EMP EU FDI FEER GDP IC IFS IMF L/C NEER ODA OECD PP PRP REER RER TOT VAR VECM WPI Asian Development Bank Augmented Dickey-Fuller Akaike Information Criterion Bangladesh Institute of Development Studies Behavioural Equilibrium Exchange Rate Consumer Price Index Direction of Trade Exchange Market Pressure European Union Foreign Direct Investment Fundamental Equilibrium Exchange Rate Gross Domestic Product Indicator of Crisis International Financial Statistics International Monetary Fund Letter of Credit Nominal Effective Exchange Rate Official Development Assistance Organization for Economic Co-operation and Development Phillips-Perron Policy Resource Programme Real Effective Exchange Rate Real Exchange Rate Terms of Trade Vector Auto Regression Vector Error Correction Model Wholesale Price Index

iv

Acknowledgement
This study has been conducted under the auspices of the BIDS-Policy Resource Programme, funded by Manusher Jonno Foundation. Their support is gratefully acknowledged. The authors express their deep gratitude to the BIDS-PRP director, Dr. K.A.S....
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