Research on Exchange Rates and Monetary Policy

BIS Working Papers

No 178

Research on exchange rates and monetary policy: an overview

by Jeffery Amato, Andrew Filardo, Gabriele Galati, Goetz von Peter and Feng Zhu

Monetary and Economic Department

June 2005

Abstract

This paper reviews research carried out on exchange rates and monetary policy by central banks that participated at the Autumn Meeting of Central Bank Economists on “Exchange rates and monetary policy”, which the BIS hosted on 28–29 October 2004. The first part of the paper focuses on the approaches that central banks have found most useful in modelling exchange rate behaviour. We describe efforts to explain exchange rate behaviour ex post and to forecast its future evolution ex ante. We then summarise central banks’ recent research on the linkage between exchange rates and inflation, output, profits and the current account. We highlight the main models and methodologies, the main empirical results and the key challenges ahead. The second part of the paper is devoted to research that examines the actual experience that countries have had in incorporating the exchange rate into their monetary policy decisions, and the main lessons learned. JEL Classification Numbers: E5, F3, F4 Keywords: Monetary Policy, International Finance, Macroeconomic Aspects of International Trade and Finance

BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The views expressed in them are those of their authors and not necessarily the views of the BIS.

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