Changes in Exchange Rate Regimes and Some Macro Factors: Their Impacts on the Valuation of Bangladeshi Taka

Abstract

Bangladesh, an emerging economy in South Asia, has gone through several regimes of exchange rate systems in the course of its 50 years of independence. A broad-based study to determine the exchange rate of the Bangladeshi taka (BDT) is missing in the existing literature. Using the annual data from 1972–1973 to 2017–2018, the study has measured the changes in exchange rates of BDT during three regimes: a fixed exchange rate, a semi-fixed system and a purely floating system or managed floating system that Bangladesh has followed in successive order. It has also described the factors that need to be affected by any change in the exchange rate. By using a desk research method, this article has investigated the roles of several macroeconomic variables such as the currency denomination of foreign exchange rate reserve components, money supply components, return on financial instruments or interest rates, gross domestic product, trade policy, asset holding strategy and interbank intervention strategy in BDT’s exchange rate fluctuations during those regimes. Among others, we found that Bangladesh’s volume of US dollars (USD) as a foreign reserve significantly outruns the sum of all other currencies and assets combined. However, an extreme dependency on USD might expose BDT to ‘currency risk’, which may be avoided by adopting a better nominal anchor and including some other major currencies in its basket.