rate movement resulting from a monetary policy shock abroad is that it brings about few trade - offs for domestic monetary policy - makers. currency appreciation would tend to have effects of the same sign on inflation and growth. however, exchange rate movements reflecting other forces, particularly those resulting in severe misalignments, would not have such benign consequences. currency swings disconnected from fundamentals, or brought about by misguided policies, have the potential to become disruptive. the empirical evidence on the cross - border effects of standard monetary policy shocks in major economies suggests the following. a monetary easing, say in the us, while depreciating the dollar, is associated with a fall in net exports and a global output expansion ; interest rates also decrease in other countries. 2 therefore, if foreign policy measures, e. g. in the form of forward guidance, can be readily matched with domestic policy actions, we should not worry about the risk of a loss of competitiveness. in addition, a foreign policy expansion might not require a domestic response that fully neutralises the exchange rate movement if there are sources of overall positive spillovers, in particular through increased foreign demand. objectives in terms of inflation and output gaps can then be achieved despite some currency appreciation. the previous argument should not be confused with an emerging “ panglossian ” perspective3 which posits that competitive devaluations triggering an exchange rate “ arms race ” would be welcome in the current conjuncture. the argument put forward is that, contrary to a tariff war that leaves everybody worse off, such a race would generate a needed global, coordinated monetary expansion. this view rests on the assumption that monetary policy - makers should do more than they are currently doing. chasing an exchange rate depreciation would make up for a perceived lack of action and deliver the appropriate symmetric policy response. however, there is no such lack of action in advanced economies, where monetary policy has see the key contributions by s. kim and n. roubini ( 2000 ) “ exchange rate anomalies in the industrial countries : a solution with a structural var approach ”, journal of monetary economics, vol. 45 pp. 561 – 586 ; and kim ( 2001 ) “ international transmission of u. s. monetary policy shocks : evidence from var ’ s ”, journal of monetary economics, vol. 48, pp. 339 – 372. “ in truth, the so - called ‘ currency war ’ is not all bad : if everyone debases

the presence of large - scale institutional change, however. this source of change is sufficiently rare in history to escape econometric testing, and sufficiently severe to impart a profound discontinuity in the data - generating process. times of institutional change are times in which the signal extraction problem for central banks is most acute. structural change may be associated with a widely dispersed range of expectations. these, in turn, may behave erratically and fail to co - ordinate on a focal point. the ecb has some examples to tell in this regard. when the european central bank started conducting policy in 1999, area - wide back data were only scantly available, many statistical indicators were still under construction. more importantly, the presumption was that the creation of the euro area would itself imply a major regime shift. therefore, the statistical patterns emerging from past data – if and when made available by aggregation of national figures – might not be informative of the structure of the new economic entity, or might even be misleading. under such circumstances, it could not be taken for granted that private agents could immediately form expectations consistent with the new regime, and thus instability in behaviour could not be ruled out. in some sense, we were studying the evolution of a moving object, which was changing for the very reason that it was being observed, as in the famous heisenberg paradox. real time misperception, false inference, knightian uncertainty, all the usual professional hazards of central banking, plus something else seemed to be compounded – let ’ s be conservative – by a factor of three. indeed, the ecb did preside over a monumental transition. the money market, for one, underwent a historical transformation on the eve of the launch of the euro in january 1999. eleven national markets, so diverse in terms of participants, operating conventions, settlement structures, credit facilities, had to merge into a unified trading area almost overnight. new payments systems for largevalue transactions were implemented. capital markets traditionally protected by currency fragmentation and national regulations were opened up to arbitrage and straight competition. yet, the transition was smooth and the abrupt switch in structural relations, which many observers had seen in the offing, did not materialise after all. markets immediately recognised the new rules of the game. they adjusted swiftly to the new monetary policy environment. since 1999, overnight rates have limited their fluctuations on the dates of monetary policy announcements to less than five basis points on average, a sign that policy