32 Pages Posted: 1 Feb 2004 Last revised: 5 Aug 2010
Date Written: February 2004
The relationship between interest rates and exchange rates is puzzling and poorly understood. But under some standard assumptions, interest rates can be adjusted to smooth real exchange rate movements at the possible price of increased volatility in other variables. In New Zealand, estimates made under some generous suppositions about what monetary policy is able to accomplish suggest that decreasing real exchange rate volatility by about 25% would require increasing output volatility by about 10-15%, inflation volatility by about 0-15% and interest rate volatility by about 15-40%.
Suggested Citation: Suggested Citation
West, Kenneth D., Monetary Policy and the Volatility of Real Exchange Rates in New Zealand (February 2004). NBER Working Paper No. w10280. Available at SSRN: https://ssrn.com/abstract=495786