Neil Irwin Has a Faulty Econ Textbook

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Friday, 08 February 2013 05:51

He presented a quote from Mario Draghi, the President of the European Central Bank:

"'The exchange rate is not a policy target, but it is important for growth and price stability. We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.'"

He then added:

"And with that, the euro fell more than half a percent against the dollar—even though Draghi was really more stating a fact from Economics 101 than signaling some major new policy plans by the central bank."

Actually the exchange certainly can and often is a policy target. There are many central banks, most notably China's, that quite explicitly target their exchange rate. Other central banks have often taken steps that clearly seem to have the purpose of raising or lowering the exchange rate, as was the case with this statement.

While a central bank can opt to ignore the exchange rate, that would be a specific policy decision. It is not a basic principle from economics textbooks.