BANGLADESH INSTITUTE OF INTERNATIONAL AND STRATEGIC STUDIES

THE OVERVALUATION OF REAL EXCHANGE RATE IN BANGLADESH: SOME PRELIMINARY OBSERVATIONS ON POLICY IMPLICATIONS

Author: Md. Shahnawaz Karim

DOI Link: https://www.doi.org/BIISSj2000v21n4a5

ABSTRACT

This paper offers an empirical study concentrating on the procedural investigation of the possibility of an overvaluation of real exchange rate in Bangladesh during the study time period under consideration. Besides, a general discussion on the probable policy implications suggested by an overvaluation of real exchange rate is also incorporated. Real exchange rate (RER) and its behavior appear to be some of the most important issues of contemporary international trade. Therefore, this topic deserves close scrutiny on its own merit. The behaviour of nominal exchange rate alone is incapable of explaining the misallocation of resources in tbe domestic economy. On the other hand, in depth analysis of real exchange rate can incorporate some more profound factors responsible for the misallocation of resources in a domestic economy and its subsequent poor macroeconomic performance. For attaining the purpose of this study, the time series of bilateral RER indexes of different categories are computed for the period 1976-1991,during which Bangladesh government is known to impose various exchange rate restrictions which may safely be said to have created the overvaluation of RER.