Ekholm, K, Moxnes, A. and Ulltveit-Moe, K. H. (2008), “Manufacturing Restructuring and the Role of Real Exchange Rate Shocks”, CEPR Discussion Paper No. 6904. European Central Bank (2002), Monthly Bulletin, June 2002. Gourinchas, P.-O. and Rey, H. (2007), “International Financial Adjustment”, Journal of Political Economy 115, 665–703. Hansson, B. and Lindberg, H. (1994), “Monetary Conditions Index – a Monetary Policy Indicator”, Economic Review 1994:3, 13–19. Krugman, P. (1989), Exchange Rate Instability, MIT Press, Cambridge. Lagervall, B. and Nessén M. (2009), “The long-term development of the krona”, Economic commentaries no. 6, Sveriges Riksbank. Lothian, J. R. and Wu, L. (2011), “Uncovered Interest Rate Parity over the Past Two Centuries”, Journal of International Money and Finance 30, 448–473. BIS central bankers’ speeches  11  Marazzi, M., Sheets, N. Vigfusson, R., Faust, J., Gagnon, J., Marquez, J., Martin, R., Reeve, T. and Rogers, J. (2005), “Exchange Rate Pass-through to U.S. Import Prices: Some New Evidence,” International Finance Discussion Paper 833, Board of Governors of the Federal Reserve System. Mark, N. C. (1995), “Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability”, American Economic Review 85, 201–218. Meese, R. A. and Rogoff, K. (1983), “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?”, Journal of International Economics 14, 3–24. Sellin, P. (2007), “Using a New Open Economy Macroeconomics Model to Make Real Nominal Exchange Rate Forecasts”, Working Paper No. 213, Sveriges Riksbank. Stevens, G. R. (1998), “Pitfalls in the Use of Monetary Conditions Indexes”, Reserve Bank of Australia Bulletin August 1998, 34–43. Svensson, L. E. O.
Changes in the real exchange rate mainly affect the economy via net exports, in which a weakening of the real exchange rate tends to increase net exports. Slightly simplified, it could be said that higher net exports lead to increased resource utilisation, higher wage growth and thus to higher inflationary pressures. The exchange rate effects arising in inflation via net exports can thus be seen as being significantly less direct than those arising via import prices, which I discussed earlier. Changes in the real exchange rate may entail adjustments to the economy that monetary policy may need to consider. For example, during a real appreciation of the krona, exporting and import-competing firms may have to review their costs so as to restore competitiveness. Among other strategies, the firms can achieve this by implementing operational changes to increase productivity.10 Such adjustments can contribute towards lower inflationary pressures, as increased productivity lowers unit costs. Another possibility for some firms is to move operations overseas. For major firms with broad international operations, it may be relatively easy, in some cases, to reorganise operations so that costs arise in another currency than Swedish kronor. However, for smaller firms with all of their production in Sweden, relocating operations overseas is generally associated with high costs. Monetary policy decision-making in consideration of the exchange rate I would now like to say a few words about how everything I have said so far about the exchange rate affects my view of monetary policy analyses and decisions.