Beholder 2 foreign currency9/8/2023 ![]() ![]() document and draw out the implications of these observations. 5 In particular, they provide evidence that the dollar exchange rate is more important than the effective exchange rate in price pass-through and trade elasticity regressions. Additionally, they show that U.S.-monetary-policy-induced dollar fluctuations are passed through into other countries’ import prices. In contrast, this is not (or not to the same extent) the case for monetary-policy-induced fluctuations in other exchange rates since import prices are sticky in dollar terms. They show that the strength of the dollar is a key predictor of global inflation, since changes in the dollar exchange rate are translated one-for-one into changes in the prices of imports in other countries. The dollar is, furthermore, a key determinant of aggregate trade volumes for the world net of the United States, since it has a sharp impact in other countries on the relative price of traded and nontraded goods, and hence on mark-ups on tradeables and the incentive to export. These patterns have implications for economic adjustment and policy, as summarised in Gopinath. 6 Specifically, they point less strongly than other views to the advantages of exchange rate flexibility as an element of the international monetary system, since nominal exchange rate changes do not deliver changes in the relative prices of imports and exports, given that the prices of importables and exportables are sticky in dollar terms. ![]() These authors then go on to develop theoretical frameworks designed to shed light on both the roots of this dollar dominance and its implications. ![]()
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