How Central Banks Use the Monetary Conditions Index

Episode 107 of Monetary Policy Explained with Fexingo. Lucas and Luna explore the Monetary Conditions Index (MCI), a composite indicator that blends interest rates and exchange rates to gauge overall policy tightness. They dive into how the Bank of Canada pioneered the MCI in the 1990s, why the Reserve Bank of New Zealand still tracks it today, and how the concept resurfaced in 2025-2026 as central banks juggle rate cuts with currency depreciation. Lucas explains the formula: a 100-basis-point rate cut equals roughly a 5% currency weakening in impact. Luna questions whether the MCI works in a world of zero lower bounds and quantitative easing. They also discuss how the European Central Bank and emerging market central banks use informal MCIs to set policy. A concrete look at an under-the-radar central bank tool that ties together two key transmission channels. #MonetaryConditionsIndex #CentralBanks #MonetaryPolicy #InterestRates #ExchangeRates #BankOfCanada #ReserveBankOfNewZealand #EuropeanCentralBank #Economics #PolicyTransmission #FinancialConditions #Currency #RateCuts #Tightening #LucasAndLuna #FexingoBusiness #BusinessPodcast #Macroprudential Keep every episode free: buymeacoffee.com/fexingo