MCIs and monetary policy

Abstract

Several central banks have recently adopted a Monetary Conditions Index (MCI) to guide monetary policy under floating exchange rates. This paper discusses some analytical and practical questions raised by MCIs. Furthermore, using data for Australia, Canada and New Zealand, which all operate monetary policy under floating rates and with an inflation target, it estimates the responses of the central banks to exchange rate changes. The results reveal clear differences between central banks: while the Reserve Bank of Australia does not appear to respond, the Bank of Canada and the Reserve Bank of New Zealand, who use the MCI as an operating target, do respond quite strongly to movements in the exchange rate.