Research on exchange rates and monetary policy: an overview

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