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Finding equilibrium: on the relation between exchange rates and monetary policy

In: The price, real and financial effects of exchange rates

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  • Sebastian Edwards

    (University of California)

Abstract

This paper deals with the relationship between exchange rates and monetary policy in small open economies. I also discuss the connection between policy rates in small countries and in major advanced economies. A main point is that central bankers need to know whether the currency is (approximately) close to its long-run equilibrium value. However, in the last 25 years there has been very little progress on finding the long-run exchange rate equilibrium. I argue that the economics profession needs to make a major effort to improve the relevant models. The historical situations discussed include the US abandonment of the gold standard in 1933, the East Asian crisis of 1997, and the recent fluctuations of the Mexican peso.

Suggested Citation

  • Sebastian Edwards, 2018. "Finding equilibrium: on the relation between exchange rates and monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), The price, real and financial effects of exchange rates, volume 96, pages 81-107, Bank for International Settlements.
    • Handle: RePEc:bis:bisbpc:96-10
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    Cited by:

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    3. Ramos-Herrera María del Carmen, 2022. "How Equilibrium Exchange Rate Misalignments Influence on Economic Growth? Evidence for European Countries," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 16(1), pages 199-211, January.
    4. Mahraddika, Wishnu, 2020. "Real exchange rate misalignments in developing countries: The role of exchange rate flexibility and capital account openness," International Economics, Elsevier, vol. 163(C), pages 1-24.

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