Working Paper: NBER ID: w2122
Authors: Martin Feldstein; Philippe Bacchetta
Abstract: The present paper introduces a new index of the real value of the dollar relative to 80 other currencies. The individual exchange rates are combined with weights that reflect the recent (1984) multilateral pattern of trade. This new index confirms that the dollar rose very sharply between January 1980 and February 1985 and that about two-thirds of that appreciation was reversed by July 1986. This is true for both our multilateral and bilateral real indices. The analysis also shows that any index that fails to adjust for differences in inflation rates will give a very misleading impression of the dollar's evolution in the 1980s.
Keywords: Dollar Value; Exchange Rates; Inflation Adjustment; Trade Weights
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation rates (E31) | real value of the dollar (D46) |
| failure to adjust for inflation (E31) | misrepresentation of the dollar's evolution (F31) |
| real exchange rate (F31) | trade competitiveness (F14) |
| dollar's nominal appreciation against developing countries (F31) | unchanged real value of the dollar (F31) |
| new index integrating trade patterns and inflation data (F14) | accurate reflection of dollar's trajectory (F31) |
| dollar's value peak in February 1985 (F31) | decline in dollar's value by July 1986 (F31) |