The Role of the Exchange Rate in Monetary Policy Rule - A Critical Evaluation

Abstract

In this essay, I examine the issues around the inclusion of the exchange rate channel into monetary policy rules, and look at how several central banks currently address exchange rates when determining interest rates. I then go onto examining the model used by Taylor in his paper, and discuss issues around this approach and make some suggestions of some desirable features for using the exchange rate channel in a policy rule. I then go on to provide an example of a very general policy rule and briefly discuss how it could be used in setting interest rates.