Since its inception in the mid-1970s, the floating exchange rate regime has been associated with large fluctuations in the values of foreign currencies. Many analysts have studied the implied interrelationship between the dollar's exchange value and US inflation and reported mixed evidence. Several reasons are suggested for the apparently conflicting results and the dollar/US inflation nexus with monthly data covering the floating period is reexamined. The results from multivariate cointegration and error-correction models indicate that the dollar's exchange rate is an important causal variable for US inflation, both in the short and in the long run. The results also imply that the Federal Reserve has been quite successful in maintaining a low inflationary environment despite the recent large fluctuations in the dollar's exchange rate.
ASJC Scopus subject areas
- Economics and Econometrics