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Non-Tech : Deflation
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To: JF Quinnelly who wrote (224)1/23/2004 6:21:59 AM
From: Ilaine  Read Replies (1) of 621
 
We don't defend the dollar exchange rate because we can't, so there's no point even trying. It's the Mundell Fleming trilemma. We picked the other two choices - free flow of capital, and ability of the central bank to carry out monetary policy in order to stimulate or slow down the economy.

European countries gave up the ability to raise and lower interest rates and increase and decrease the money supply and thus, have the ability to control exchange rates.

Historically, China gave up free flow of capital, so had the other two, which is why Chinese currency is pegged to the dollar. Thus, as the dollar falls, the Chinese exchange rate vis-a-vis non-dollar currency falls, too.

Our economy is big enough that we scarcely notice the exchange rate. Commodity prices are such a small part of finished goods in the US.
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