It has a large volume of analysis on the exchange rate – presented both in lay terms and in as technical a form as you could ever wish.1 Before I begin though, it is worth noting, what I think everyone now accepts, that the solution to a high and variable exchange rate is not higher inflation.
International and historical experience has shown that if a central bank runs monetary policy looser than is required it will generate inflation. Such future inflationary problems would be very costly to resolve in terms of growth and employment. Is the exchange rate high? An initial question is whether the exchange rate is high.