Do central banks respond to exchange rate movements? Some new evidence from structural estimation

This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand, and the United Kingdom. We develop and estimate a structural general equilibrium model, in which monetary policy is represented as a simple rule and exchange rate pass‐through is incomplete due to the presence of local currency pricing and distribution services. We find that the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have not adjusted interest rates in response to exchange rate movements since the adoption of inflation targeting, while our model selection results for Australia are less clear.