At the same time, the vulnerabilities of an open emerging economy and the problems of extreme volatility in the exchange rate informs and guides our approach. Stability in exchange rates: means & mechanics 5.
The proximate problem that a central bank faces is maintaining a reasonably stable exchange rate, a variable that captures not only the external sector imbalances but also the future expectations of the relevant fundamentals. Empirical studies show that, in the short run, exchange rates behave as asset prices and follow a “random walk”.