4.28.2005
When the Dollar Bill Comes Due (NYTimes.com)
OP-ED CONTRIBUTOR
By CATHERINE L. MANN and KATHARINA PLÜCK
Published: April 27, 2005
Washington
OVER the last two years, the value of the dollar against the major currencies has dropped by more than 25 percent. With the dollar having depreciated so much, why haven't we seen a narrowing of the trade deficit, which in February (the latest month for which numbers are available) reached a new record of $61 billion? A dollar depreciation should bring about what economists call "expenditure switching": as the cost of imports rises, Americans should start buying more goods made at home; in turn, our exports become less expensive for foreigners, which means foreign demand for our products should rise. This shift in exchange rates and prices should eventually correct the country's trade deficit.
But so far, Americans' appetite for imports has yet to slow. That's because, with the exception of oil, imports have not become that much more expensive. One reason is that about 30 percent of our imports come from countries whose currencies have either moved little (the Thai baht), stayed stable (the Chinese yuan) or fallen (the Mexican peso) against the dollar.
But another reason is the worldwide decline during the 1990's of what economists call "pass-through rates": that is, the extent to which changes in the exchange rate induce changes in a country's import and export prices. A study by the economists Linda Goldberg and José Manuel Campa found that pass-through rates for the United States were significantly less than for other industrial countries. A 10 percent change in the dollar has generally yielded only a 2.5 percent change in American import prices within one quarter, and only a 4 percent price change after several quarters. Another study by the Federal Reserve found that pass-through was nearly zero. Indeed, in the case of the Japanese yen, even a 25 percent rise in the yen to dollar rate has generated little if any increase in the price we pay for Japanese goods.
(More ... The New York Times > Opinion > Op-Ed Contributor: When the Dollar Bill Comes Due) ¶ 08:51
By CATHERINE L. MANN and KATHARINA PLÜCK
Published: April 27, 2005
Washington
OVER the last two years, the value of the dollar against the major currencies has dropped by more than 25 percent. With the dollar having depreciated so much, why haven't we seen a narrowing of the trade deficit, which in February (the latest month for which numbers are available) reached a new record of $61 billion? A dollar depreciation should bring about what economists call "expenditure switching": as the cost of imports rises, Americans should start buying more goods made at home; in turn, our exports become less expensive for foreigners, which means foreign demand for our products should rise. This shift in exchange rates and prices should eventually correct the country's trade deficit.
But so far, Americans' appetite for imports has yet to slow. That's because, with the exception of oil, imports have not become that much more expensive. One reason is that about 30 percent of our imports come from countries whose currencies have either moved little (the Thai baht), stayed stable (the Chinese yuan) or fallen (the Mexican peso) against the dollar.
But another reason is the worldwide decline during the 1990's of what economists call "pass-through rates": that is, the extent to which changes in the exchange rate induce changes in a country's import and export prices. A study by the economists Linda Goldberg and José Manuel Campa found that pass-through rates for the United States were significantly less than for other industrial countries. A 10 percent change in the dollar has generally yielded only a 2.5 percent change in American import prices within one quarter, and only a 4 percent price change after several quarters. Another study by the Federal Reserve found that pass-through was nearly zero. Indeed, in the case of the Japanese yen, even a 25 percent rise in the yen to dollar rate has generated little if any increase in the price we pay for Japanese goods.
(More ... The New York Times > Opinion > Op-Ed Contributor: When the Dollar Bill Comes Due) ¶ 08:51
