Report on Inflation

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EVOLUTION OF EXCHANGE RATE REGIME: IMPACT ON MACRO ECONOMY OF BANGLADESH

by

Liza Fahmida

A project submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance

Examination Committee: Dr. Sundar Venkatesh (Chairperson) Dr. Juthathip Jongwanich Dr. Yuosre Badir

Nationality: Bangladeshi Previous Degree: Master in Finance and Banking University of Dhaka Bangladesh Scholarship Donor: Bangladesh Bank

Asian Institute of Technology School of Management Thailand May 2012

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ACKNOWLEDGEMENT The dissertation paper entitled “Evolution Of Exchange Rate Regime: Impact On Macro Economy Of Bangladesh” has been prepared for the partial fulfillment of Professional master in Banking and Finance (PMBF) program conducted by School of Management, AIT, Thailand. I would like to offer my wholehearted gratitude and respect to a good number of people who offered encouragement, data and information, inspiration and assistance during the course of constructing this dissertation paper. It would be difficult to prepare the paper and to present it in a lucid manner within stipulated time without the help of my guide teacher Dr. Sundar Venkatesh, Adjunct Faculty, School of Management, Asian Institute of Technology, Thailand. His utmost care, constant support and meticulous supervision guided me through the process. I am indebted to Begum Sultana Razia, General Manager, Monetary Policy Department, Bangladesh Bank, whose sincere co-operation and valuable advice help me to prepare this paper. I would like to thank all of my colleagues and other employees of Foreign Exchange Policy Department and Monetary Policy Department, Bangladesh Bank for their assistance in this regard. I would like to thank all of fellow course mates who contributed through their comments and suggestions to prepare the report in a comprehensive manner.

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ABSTRACT Bangladesh had two different exchange rate regimes- a fixed exchange rate system from January 1972-May 2003 and a floating exchange rate regime since June 2003. After adopting the floating exchange rate regime Bangladesh experienced positive impacts on macro economic development. The variables of the macroeconomic factors have been considered as foreign reserve, workers’ remittances and export proceeds to evaluate the impact of exchange rate over them in this paper. But the ongoing challenges for the country are the depreciating trend in local currency in a highly inflationary economy. The objective of the paper is to evaluate the macroeconomic performance over the regimes and to analyze present currency situation of Bangladesh.

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Table of Content NO. 01 Title page Acknowledgement Abstract Table of contents List of Figures List of Abbreviations Chapter-01 02 1.1 Rationale 1.2 Scope 1.3 Objectives of the study 1.4 Methodology 1.5 Limitations 1.6 Organization 02 Chapter-02 Literature Review 03 Introduction 3.1 Factors Affecting Exchange Rate 3.2 Performance of previous and current FX-Regime in Bangladesh rate of GDP 3.2.1 Growth Unde 3.2.2 Current Account Balance 3.2.3 Inflation Situation 3.3 Justification of Floating Exchange Rate 3.4 The Transition from Fixed to Float 04 Chapter-04 Performance of Floating Exchange Rate System On Macro Economy of Bangladesh 4.1 The Export On Macro Economy of Bangladesh Situation 4.2 Enhancement of Workers Remittance 4.3 Reserve Position 4.4 The Growth Rate of GDP 13 14 14 15 7 8 8 8 9 10 10 Chapter-03 Exchange Rate Evolution in Bangladesh 7 Introduction 1 1 1 2 2 2 3 3 SECTION Page I ii iii iv V vi

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4.5 Relationship among variables 05 Chapter 5 Preset Exchange Rate Situation Preset Exchange Rate Situation 5.1 Exchange Rate Movement 5.2 Reasons for Currency Depreciation 5.2.1 High Inflation 5.2.2 Low Foreign Direct Investment 5.2.3 Trade Deficit Chapter 6 06 Recommendation and Conclusion 6.1. Control Inflation 6.2. Reduce Trade Deficit 6.3 Enhancing Foreign Direct Investment 6.3 Effective...
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