The role of the exchange rate in monetary policy

Quarterly Bulletin 1994 Q3
Published on 01 September 1994

The Governor discusses the role that should be given to the exchange rate within monetary policy. He affirms the desirability of stable real exchange rates, both as a necessary complement to free trade and in the context of domestic policies aimed at achieving monetary stability. But, he argues, the cart of exchange rate stability should not be put before the horse of domestic stability. And he suggests that if countries were more successful in their pursuit of stability—which is an increasingly widely shared approach, and in Europe is reflected in the convergence criteria of the Maastricht Treaty—that would go a long way towards bringing about more stable exchange rates.

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