Bangladesh has been pursued an active exchange rate policy from the very inception of the country’s independence in 1971, which is reflected in frequently announced nominal exchange rate changes of the Bangladesh Bank. Islam (2003) cited 89 adjustments in the exchange rate of taka in terms of dollar from 1983 onward of which 83 were devaluation. Aziz (2003) observed 41 times devaluation between 1991 and 2000. Younus et al (2006) state that between 1972 and 2002 the ‘Taka’ was devalued about 130 times to reduce the balance of payment deficits of Bangladesh. Hence this paper rightly chooses the exchange rate as the key explanatory variable of balance of trade.
This paper has calculated the nominal and real effective exchange rate of Bangladesh and the following figure exhibits the variability of the NEER and REER from 1972 to 2005. The graph demonstrates that the REER variability was the highest in the fixed exchange rate regime.
5.2
4.8
4.4
4.0
3.6
3.2
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 Figure1: Exchange rate regimes and variability of REER and NEER.
[Note that the study has measured the nominal and real effective exchange rate in this paper by using the following technique:
Where,
F i
=
k
∑
it jt
NEERjitREER
=
=
⎝ ⎛
⎜ ⎜ i jt
1
k
∑
EwNEER
… k), t = time; x e d M a n i ititjit
* it
P ,
=
1
P and jt P P
*
⎠ ⎞
⎟ ⎟ 5 ; j implies reporting country; i trading partners (i = 1, w are trading partners wholesale prices index (WPI) if available otherwise consumer price index (CPI), Bangladeshi Price index (the study it LREER LNEER a g e d
F
l o a