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 con ...