How much should inflation targeters care about the exchange rate?

► We assess whether having the exchange rate in a monetary rule improves performance. ► We use DSGE models for both financially-robust and financially-vulnerable economies. ► We get inflation and output volatility with risk premium, demand, and supply shocks. ► Financially-vulnerable economies benefit the most from exchange rate smoothing. ► However, only a small weight should be placed on the exchange rate.