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Intervention and monetary policy

Оглавление

The impact of floating exchange rates on monetary policy (the process by which the monetary authority of a country controls the supply of money) has changed over the years. Initially monetary policy under floating exchange rates was characterised by targeting money growth. Interest rates were set to limit growth in monetary aggregates, which was viewed as the key to price stability. Since the exchange rate was not an explicit part of this strategy, foreign exchange interventions were not required.

The arrival of inflation targeting in the 1990s significantly challenged the one-variable approach; instead, all variables that might influence future inflation were taken into account in setting monetary policy. In this context the degree of exchange rate pass-through to domestic prices determines the extent to which the central bank will have to incorporate exchange rate movements in their decision process. If the exchange rate is important for future inflation (i.e., the pass-through effects of exchange rate changes on inflation occur faster than the interest rate effects on inflation) then it follows that intervention might be a useful instrument.

Foreign Exchange: The Complete Deal

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