Bangladesh Bank Training Academy Journal

Abstract

Though exchange rate was stable in the initial stage of floating regime in Bangladesh, sharp depreciations occurredduringAugust2004 toApril 2006and again in July 2010 to January 2012. As excessivefluctuation of exchange rate can be an obstacle to macroeconomic stability, it is important to know the sources offluctuations in both thephases. In this context, thispaper tries to investigate theprobable reasonsbehindsharp depreciationofBangladesh Taka (BDT) against US dollar (USD) in these twophasesusingStructural VectorAuto-regression (SVAR)modelfollowing Clarida and Gali (1994) and uses datafrom January 2003 to June 2012. Thepaperfinds that both the demandshocks mainly arisingfrom external sector and the supply shocks were responsible behind such deprecierions.However, thesupply shocks were less effective than demandshocks in exchange rate fluctuations and the money supply shock also had a negligible effect on the depreciation ofBDT during theperiod of this study.