Nominal and Real Effective Exchange Rates for Bangladesh: 1973:07–2008:12

Abstract

Bilateral real exchange rate is used in examining the price of domestic goods in terms of partner’s goods and it is especially useful for bilateral modelling. On the other hand, real effective exchange rate serves as the price of domestic goods in terms of a basket of foreign goods and is especially useful for aggregate or multilateral modelling.The method of construction of both the bilateral and the multilateral or effective exchange rate depends on the definition of nominal bilateral exchange rate (direct or indirect), the method of averaging (arithmetic or geometric), and the calculation of trade weight (considering either the value of export or import or total trade). This paper uses both the arithmetic and the geometric mean as averaging technique and considers three kinds of trade weights, namely, export weights, import weights, and total trade weights in the construction of effective exchange rate indices. Using twenty one major trading partners of Bangladesh, which covers about 80 percent of her total trade, we prepare a comprehensive data base on nominal effective exchange rates, real effective exchange rates, trade policy bias index etc. both by using the fixed and the variable weight for the period 1973:07– 2008:12 on a monthly basis. From this study it has been observed that there is a declining trend in the effective exchange rates of Bangladesh, which indicates an overall devaluation of Bangladeshi taka against her partner currencies both bilaterally and multilaterally. The result is robust no matter whether we use the fixed or the variable weight. As a supplementary exercise, the prepared data has been used in estimating the trade policy bias index and it is found that Bangladesh’s trade policy has become proexport starting from December 2000. However, the process has been slowed down slightly in the most recent time.