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BPEA Article

Exchange Rates and the Prices of Nonfood, Nonfuel Products


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.


Peter Hooper

Managing Director, Chief Economist - Deutsche Bank Securities

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