Journal Article

Is a weak dollar inflationary?

Abstract: Since the early seventies, the U.S. dollar has been allowed to float freely, and its exchange rates have become extremely volatile and difficult to explain, let alone to predict. The dollar's erratic behavior has stimulated a lively debate in academic and policy circles over what the government's response should be. One of the major questions that must be answered before a response can be contemplated is whether dollar exchange rate changes influence U.S. inflation. ; This article examines the empirical relationship between dollar movements and inflation in the United States. Historical evidence suggests that a falling dollar causes inflation to increase but by a very small amount, and the author discusses why the inflationary effects of a weak dollar are so small. One possible answer is that when the dollar depreciates, sellers of traded goods may choose not to increase prices in response but to reduce their profit margins instead.

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: Economic Review

Publication Date: 1995

Volume: 80

Issue: Sep

Pages: 1-14