ASA University Review, Vol. 3 No. 2, July–December, 2009 Exchange Rate and Its Impacts On GDP and Inflation in Bangladesh Saleh Mohammed Mashehdul Islam * Shyamapada Biswas ** Abstract This paper compares the economic track records of the two different exchange rate regimes the “Fixed Exchange Rate” and the “Free Floating Exchange Rate System” in maintaining economic performance. This paper also considers relationships between exchange rate and Inflation and between exchange rate and GDP in Bangladesh. Bangladesh experiences of moving away from a currency board system to floating regime since 2003 offers a lesson worthy of attention from the point of view of efficiency of “Floating Rate System” in least developed countries like Bangladesh. “Floating exchange rate regime in Bangladesh contrasts with its neighbor’s currency board system. Experiences in Bangladesh and abroad show that all that a government needs in this regard is to maintain confidence in the currency, secure currency's strength and ensure its full convertibility. As long as this is backed by sufficient reserve of the foreign exchanges and there is firm political and economic will, adoption of a successful free exchange rate regime is possible. Introduction The optimal choice of exchange rate system is a long-standing problem in open-economic system. Modern analysts argued that flexible exchange rates are preferable to fixed exchange rates on the grounds that flexible exchange rates provide greater insulation from foreign shocks. By the end of 1998 many countries had allowed to float currencies against other. That is the currencies were not formally pegged to other currencies. However, exchange rate policy is still a source of exasperation, and appropriate choice is by no means clear. On question whether a country should allow its currency to float, economists do not offer clearly persuasive answers. Even for the largest and most developed economies with most developed domestic capital markets the choice of exchange rate policy is probably the single most important policy decision that strongly influences their freedom of action and the effectiveness of other policies. Objective and Methodology of the Study Objective of the Study The objective of this study is to investigate the exchange rate policy of the government of Bangladesh since independence (1971) and to analyze its impact on inflation and growth of the economy i.e. GDP. The study intends to single out what steps Bangladesh should undertake to make its exchange rate policy sound so that inflation could be kept under control and growth of * Assistant Professor, School of Business, Ahsanullah University of Science and Technology ** Associate Professor, School of Business, Ahsanullah University of Science and Technology