An Appraisal of Exchange Rate Behavior of Bangladesh

Abstract

Exchange rate is one if the central issues of macroeconomic policy. This has received particular attention from policy makers and researchers when Bangladesh adapted the floating exchange rate system. This study analyzes the exchange rate management and exchange rate behavior of Bangladesh for the period 2000 to 2009. Exchange rate of Bangladesh has received wide attention among all concerned from end-May, 2003 when Bangladesh adopted the floating exchange rate system. The exchange rate management has, of late, received renewed attention with the emergence of global fmancial crisis and its likely impact on trade, investment and overall gross domestic product (GDP) growth in 2007/08. The importance of exchange rates is very clear. But the reasons for which the exchange rates fluctuates more is not known. Some important factors for the economy of any country are interest rates for that country, its inflation rates and GDP growth rate. It could be possible that these economic factors can directly influence the exchange rates movement of any country. It is applicable for Bangladesh also. With these expectations here it has been tried to find the relationship among the exchange rates fluctuations of Bangladesh with the economic factors of the country - interest rates, inflation rates and GDP growth rate. To analyzes the impact of interest rate, inflation rate and GDP growth on the exchange rate, this project considered the mostly exchangeable currencies with Bangladeshi taka, which are - Indian rupee, Japanese Yen, US Dollar, UK Pound and Euro. The statistical analysis revealed no direct relationship between the economic factors and the exchange rate for the currencies. The project study reflects that the increase and decrease in interest rate, inflation rate and GDP growth rate do not result in simultaneous increase or decrease in exchange rates. There may be some other factors which govern exchange rate fluctuations. Further research and analysis is needed to find out the cause and reasons behind the exchange rate variations. It is very important to make the exchange rate stable among the currencies. It will decrease the risk of international trade. If the risk due to variations in exchange rate is minimized both the international business and foreign trade will be enhanced and it will have a positive impact on the economy of Bangladesh. Stability in the exchange rates will help the economic development of the country and also may add additional value to the countries economy. So it is very important to find out the reasons for which the exchange rate fluctuates frequently. If it is possible to find out the reason of exchange rate fluctuation and solve the problem, it will increase the opportunity for Bangladesh.