Economic Monetary Policy

Question 1 In their paper on U.K. monetary policy and EMU entry, Kontolemis and Samiei (2000) begin by observing the differences in the business cycles between the EU economies and that of the UK. The cycles in the UK are different from the continent because of "different policies or exogenous variables, different transmission mechanisms, and different idiosyncratic shocks" (Kontolemis and Samiei 2000, p. 3). For example, the UK business cycles tend to be a bit more volatile and …

…lose credibility with respect to both goals. How much inflation will a central bank tolerate to avoid a further appreciation of the exchange rate? How big an appreciation will it endure to avoid inflation? This basic targets-versus-instruments problem underlies the controversy about foreign-exchange market intervention. The central question that both the theoretical and empirical investigations address is: Does intervention afford monetary authorities a means of influencing exchange rates independent of their domestic monetary policy objectives?