BPEA | 1984 No. 2

Exchange Rates and the Prices of Nonfood, Nonfuel Products

Wing T. Woo Peter Hooper
Peter Hooper Managing Director, Chief Economist - Deutsche Bank Securities

1984, No. 2

IT IS OFTEN SAID that the rise in the value of the U.S. dollar since 1980 has played an important role in slowing the inflation rate, and there is a corresponding concern that a sharp drop in the currently high U. S. dollar exchange rate will have a serious inflationary effect. A casual look at recent experience with exchange rate and price movements lends credence to this concern. Table 1 shows that for every year since 1975, a depreciation of the dollar has always been accompanied by a higher inflation rate; and an exchange rate appreciation invariably has been linked with a lower inflation rate. This paper evaluates whether changes in the exchange rate actually have important effects on the price level.