The Monetary Conditions Index is a composite index of interest and exchange rates frequently usedby central banks, the IMF, and the OECD. This paper considers the benefits and weaknesses of theMCI in the light of large macroeconometric models. It follows that the impact of the exchange rateon GDP relative to the impact of the short-term interest rate is substantially lower under a monetaryunion. For most countries, including a long-term interest rate in the MCI only affects the level of theMCI and not its turning points.
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