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Exchange rate policies

In: The international financial crisis and policy challenges in Asia and the Pacific

  • Charles Engel

    (University of Wisconsin)

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.

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This chapter was published in:
  • Bank for International Settlements, 2010. "The international financial crisis and policy challenges in Asia and the Pacific," BIS Papers, Bank for International Settlements, number 52, 5.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 52-12.
    Handle: RePEc:bis:bisbpc:52-12
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