Discussion Paper

Exchange rate policies

Abstract: Modern macroeconomic theory teaches us new lessons about exchange rates: Currency depreciations or appreciations that change the relative competitiveness of producers in different countries are undesirable from a global perspective if they lead to relative prices that do not reflect the true relative costs of production. From this standpoint, \\"external balance\\" does not mean that trade balances should be zero, but rather that global resources are allocated efficiently. The implications of this insight for the role of the exchange rate in monetary policy are explored here. Some of the traditional arguments for purely floating exchange rates are challenged by this approach. The paper also briefly considers sterilized intervention and comments on the role of international reserves.

Keywords: Monetary policy; Depreciation; Foreign exchange; International trade; Foreign exchange rates; Balance of trade;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Staff Papers

Publication Date: 2009

Issue: Nov

Order Number: 8