The exchange rate and monetary conditions in the euro area

The Exchange Rate and Monetary Conditions in the Euro Area.- Using informat ion from a variety of sources, this paper suggests that the exchange rate w ill play an important role in the transmission of the impact of monetary po licy on the real economy and inflation in the euro area. As a first approxi mation it would be reasonable to assume that an increase in the real 90-day interest rate of 100 basis points would have the same effect on demand two years later as a 3.5 percent fall in the real euro exchange rate. This imp lies that the euro area will tend to behave like a large open economy rathe r than a closed economy and hence that it would be helpful in informing mon etary policy to construct a Monetary Conditions Index (MCI). JEL no. E52, E 58.