Speech by Vice Chairman Fischer on the transmission of exchange rate changes to output and inflation | Summary and Q&A

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November 13, 2015
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Federal Reserve
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Speech by Vice Chairman Fischer on the transmission of exchange rate changes to output and inflation

TL;DR

The appreciation of the US dollar has had significant effects on the US economy, particularly through its impact on exports and inflation.

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Key Insights

  • ☠️ The exchange rate of the US dollar plays a significant role in the US economy, especially considering its growing global trade and financial linkages.
  • 🥺 The appreciation of the dollar has led to a decline in US exports, impacting GDP and economic growth.
  • 💱 Import prices have been relatively resistant to changes in the exchange rate, minimizing the impact on inflation.
  • 🫢 Monetary policy has been accommodative in response to the exchange rate shocks, providing support for economic activity.

Transcript

[Applause] VICE CHAIRMAN FISCHER. Thanks very much, and good evening. And looking at the program, I feel really sorry that meanwhile they've cooked up another program for some of us, and we go to meetings and decide about interest rates and things like that, which are much less interesting at the moment than many of these papers. I want to talk abo... Read More

Questions & Answers

Q: Why does the exchange rate matter more for small open economies?

Small open economies heavily rely on international trade, making fluctuations in the exchange rate more consequential for their exports and imports. The exchange rate directly affects their competitiveness in global markets.

Q: How does a stronger dollar affect the US economy?

A stronger dollar makes US exports more expensive for foreign buyers, leading to a decline in exports. On the other hand, imports become relatively cheaper, which can increase their demand. This imbalance can negatively impact GDP and cause downward pressure on inflation.

Q: How does the appreciation of the dollar affect inflation?

The stronger dollar puts downward pressure on import prices, which can lead to lower inflation. The pass-through effect of the exchange rate on import prices is relatively low, but it still contributes to the overall decline in inflation.

Q: How has monetary policy responded to the appreciation of the dollar?

Monetary policy, as reflected in the Federal Funds Rate, has been eased in response to the decline in inflation caused by the appreciation of the dollar. Lower interest rates aim to stimulate economic activity and counteract the negative effects of the exchange rate on GDP.

Summary & Key Takeaways

  • The exchange rate of the US dollar has traditionally had less impact on the US economy compared to small open economies, but its importance has grown due to global trade and financial linkages.

  • A 10% appreciation of the US dollar leads to a decline in exports by about 3% after a year and more than 7% after three years, which results in a decrease in GDP by slightly over 1.5% after three years.

  • The stronger dollar also exerts downward pressure on import prices, causing core PCE inflation to decline by about 0.5% in the two quarters following the appreciation.

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