Exchange rates and inflation

Federal Reserve Governor on exchange rates and inflation. He concludes:

Now let me summarize the lessons from the empirical evidence on exchange rate pass-through. Sizeable depreciations of the nominal exchange rate exert fairly small effects on consumer prices across a wide set of industrial countries, and these effects have declined over the past two decades. Exchange rate depreciations are thus likely to have less adverse effects on inflation than they have had in the past. The empirical evidence also indicates that pass-through from exchange rates to import prices is low and has declined markedly over the past two decades. This evidence suggests that there may be a weaker relationship between exchange rate fluctuations and nominal demand than prevailed in the past, which may make it easier for monetary policy to stabilize inflation and real activity. Nevertheless, exchange rate fluctuations can still have an effect on inflation and economic activity; hence, monetary policy must continue to take these fluctuations into account to ensure that inflation expectations remain well anchored and that fluctuations in economic activity are minimized.

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