ABSTRACT
Monetary policy determines the value of domestic money in terms of domestic goods. Foreign exchange rate policy determines the value of domestic money in terms of foreign goods. These two values of money must eventually coincide. In the absence of free capital mobility, the identity between monetary and exchange rate policies is likely to hold only in the very long run. But when capital movements are unrestricted —a condition toward which many countries are now moving —monetary and exchange rate policies become inextricably linked, even in the short run.
