True or False?
As long as the word "essentially" stays in the above sentence, the statement can be regarded as true. As was noted, it is clear from the evidence presented in my book, Interest Rates, Exchange Rates and World Monetary Policy, that there is no relationship between unanticipated monetary shocks in these countries (and in France and Germany) and the relevant real exchange rates. Since the actual variations in base money turn out to be rather substantial, and since one cannot rule out overshooting effects of unanticipated base money shocks on nominal and real exchange rates, it must have been the case that the observed changes in base money were made by the relevant monetary authorities to prevent "disorderly" nominal exchange rate changes arising from demand-for-money shocks. This being the case, the monetary authorities in these countries must have been continually providing domestic residents with the quantities of money they wished to hold given their expectations concerning the domestic inflation rate. This means essentially that these countries are following roughly the same monetary policy as is being followed in the United States with the domestic real exchange rates with respect to the U.S. adjusting continuously in response to the differential effects across countries of the real forces of technical change and economic growth.
Independent domestic monetary policy actions are necessary, however, when the authorities wish to change the underlying inflation rate that is being validated by their current orderly markets policy. There is evidence that inflation control policies were implemented in Britain and Japan (and also in France and Germany). These policy actions seem to have involved gradual pressure on nominal and real exchange rates sufficient, along with changes in bank rate relative to other domestic interest rates, policy announcements regarding inflation targets, and resulting conclusions of the public regarding the authorities' desire for change, to lead to appropriate reductions in the expected domestic inflation rate. Once this has happened, the monetary authorities can return to the automatic finance of the public's inflationary expectations and short-run demand-for-money changes.