Magazine article Economic Trends

Monetary Policy and the Dollar's Decline

Magazine article Economic Trends

Monetary Policy and the Dollar's Decline

Article excerpt

Third-quarter GDP growth in the euro area and Japan came in lower than analysts had anticipated, prompting many foreign policymakers to complain that the dollar's renewed depreciation poses a major downside risk to their countries' future economic growth. Dollar depreciation shifts worldwide demand toward U.S. goods and services by raising the dollar price of foreign items and lowering the foreign-currency price of U.S. products. What can policymakers do?

The European Central Bank and the Bank of Japan recently focused on providing sufficient liquidity to accommodate economic growth. The Federal Reserve System, on the other hand, has moved since midyear to reduce the accommodative stance of monetary policy. A further move by each of the three parties in its present direction would seem consistent with slowing the dollar's recent descent and promoting its individual business cycle objective.

Ardently pursuing a weaker dollar, on the other hand, could eventually put each country's inflation objective at risk. The problem is not so great in Japan, where prices continue to drop, or in the U.S., where inflation, though low, has recently been on an uptick. …

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