Macroeconomic variables and exchange rates - a complex interplay and the role of a central bank

Fluctuations in exchange rates are both the causes and consequences of changes in major macroeconomic variables. One triggers the other in a complex interplay of forces, and there is a chain of actions and reactions leading to a sizeable shift in certain macroeconomic variables at an unacceptable pace or in an undesired direction calling, at times, central banking or government intervention to break the momentum. The paper analyses the nexus between some major macroeconomic variables and the exchange rate. It also examines the situations where it may be required for the central bank to make changes in the policy rates or other components of its monetary policy to curb excessive volatility in exchange rates and/or to influence the macroeconomic variables in the general interest of the economy.