Exchange Rate Policy in Bangladesh: a Review of Key Concepts and Issues
Exchange Rate Policy in Bangladesh: A Review of Key Concepts and Issues
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In an open and deregulated economic environment, exchange rates can play an important role in macroeconomic management for stability and growth. The increasing role of exchange rates since the early 1970s has indeed been a break from the Bretton Woods tradition of the 1950s and 1960s that assigned a limited role for exchange rates in economic affairs. However, the banking and currency crises of the 1990s that afflicted many developing countries in different regions have provided a somber lesson that in a global economic setting, exchange rate policy, and monetary and financial policy more broadly, cannot be treated in a business as usual fashion. This is more so for countries, which have underdeveloped financial systems, poor governance but open capital accounts. The stake is indeed high because the way an emerging market economy conducts its exchange rate policy does have a profound impact on its current and future macroeconomic performance. As the experiences of various countries in Asia, Africa and Latin America suggest, economic, social and political costs of mis-aligned real exchange rates, policy-induced or structural, could be formidable (Edwards, 1989; Ghosh, Lane, Schulze-Ghattas, Bulir, Hamann and Mourmouras, 2002). Therefore, it becomes a vital policy issue to choose an exchange rate system that is compatible with a developing economy 's characteristics and needs.
I. Exchange Rate Policy and Exchange Rate Management
In the simplest sense, exchange rate policy addresses the management of rates at which the domestic currency is converted to another currency(ies) by a public agency such as a central bank. These rates can be converted at a fixed rate or a floating(changing) rate. Exchange rate policy is managed in one of two ways: through a fixed rate or through a floating rate.
Management, under a floating exchange rate
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In an open and deregulated economic environment, exchange rates can play an important role in macroeconomic management for stability and growth. The increasing role of exchange rates since the early 1970s has indeed been a break from the Bretton Woods tradition of the 1950s and 1960s that assigned a limited role for exchange rates in economic affairs. However, the banking and currency crises of the 1990s that afflicted many developing countries in different regions have provided a somber lesson that in a global economic setting, exchange rate policy, and monetary and financial policy more broadly, cannot be treated in a business as usual fashion. This is more so for countries, which have underdeveloped financial systems, poor governance but open capital accounts. The stake is indeed high because the way an emerging market economy conducts its exchange rate policy does have a profound impact on its current and future macroeconomic performance. As the experiences of various countries in Asia, Africa and Latin America suggest, economic, social and political costs of mis-aligned real exchange rates, policy-induced or structural, could be formidable (Edwards, 1989; Ghosh, Lane, Schulze-Ghattas, Bulir, Hamann and Mourmouras, 2002). Therefore, it becomes a vital policy issue to choose an exchange rate system that is compatible with a developing economy 's characteristics and needs.
I. Exchange Rate Policy and Exchange Rate Management
In the simplest sense, exchange rate policy addresses the management of rates at which the domestic currency is converted to another currency(ies) by a public agency such as a central bank. These rates can be converted at a fixed rate or a floating(changing) rate. Exchange rate policy is managed in one of two ways: through a fixed rate or through a floating rate.
Management, under a floating exchange rate
References: Aghevli, B., M. Khan and P.J. Montiel (1991), Exchange Rate Policy in Developing Countries: Some Analytical issues, IMF Occasional Paper No.78, Washington, D.C.: IMF. Bangladesh Bank (1993), Economic Trends (Dhaka: Bangladesh Bank). Dornbusch, R. (1977), "Expectations and Exchange Rate Dynamics", Journal of Political Economy, Vol.84, pp.1161-1176. Edwards, S. (1989), Exchange Rate Misalignment in Developing Countries (Baltimore, MD: Johns Hopkins University Press). Fischer, S. (2001), "Exchange Rate Regimes: Is the Bipolar View Correct?", Journal of Economic Perspective, Volume 15, Number 2, pp.3-24. Ghosh, A., T. Lane, M. Schulze-Ghattas, A. Bulir, J. Hamann and A. Mourmouras, (2002), IMF-Supported Programs in Capital Account Crises, Occasional Paper No.210, (Washington, D.C.: IMF). Hossain, A. (2000), Exchange Rates, Capital Flows and International Trade: The Case of Bangladesh (Dhaka: University Press Limited). Hossain, A. (2002b), "Exchange Rate Responses to Inflation in Bangladesh", Mimeo. IMF (1997), "Analytical Issues in the Choice of Regime", Chapter IV, World Economic Outlook (October) (Washington, D.C.: IMF). IMF (2000), World Economic Outlook (various issues) (Washington, D.C.: IMF). Rahman, A. and A. Razzaq (1998), "Informal Border Trade Between Bangladesh and India: An Empirical Study in Selected Areas", Unpublished Manuscript, BIDS, Dhaka, Bangladesh. Rogoff, K. (2002), "Dornbusch 's Overshooting Model After Twenty-Five Years", IMF Working Paper WP/02/39 (Washington, D.C.: IMF). Tobin, J. (1998), "Financial Globalization: Can National Currencies Survive?", Paper presented at the Annual World Bank Conference (Washington, D.C.: World Bank). World Bank (1996), "Bangladesh: Trade Policy Reform for Improving the Incentive Regime", Country Department, South Asian Region, Report No.15900-BD (Washington, D.C.: World Bank).