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 and 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!
Note: I suspect the comment section over there will look a bit like this – and so will hold off from reading till the weekend.
Update: Scott Sumner covers similar ground by railing against “imbalances” as a concept – stop concentrating on the price, and start thinking about why the price has shifted. Lars Christensen reiterates this before both of us. In some sense, the Lucas Critique stemmed from this very idea. I genuinely don’t understand why simply saying “let us think of why the price changed, and what the trade-offs are from this fundamental shift (and any policy to change it)” makes people so incredibly angry – but it does! I have no social skills, and have a passion for discussing trade-offs, so I will never stop making this point – no matter how many nights in bars I have to put up with people yelling at me while I’m drinking my beer