Over on Rates Blog I’ve knocked up an entry on exchange rates. In it, I spend a bunch of time just talking about “what an exchange rate is” – all with the aim of turning around a saying that given it is a price, we need to understand what it is telling us and why before we can go off and demand changes.
Effectively, the exchange rate is a symptom of things going on in the real economy – and policy needs to be focused on where these fundamentals may be hit by market and goverment failures, instead of a blanket criticism of the price. I’d also note that there is a “barrier” to intervention in all this – we do need to actually have a fundamental understand of the issues before we put policy in place. The persistently high real exchange rate is an issue that has caused some concern (*,*,*) – but “solving” any perceived problem here does not lead us to the conclusion of arbitrarily loosening monetary policy!