Gita Gopinath on Trade and Exchange Rates

She says,

most of trade invoicing is done in dollars. More recent research shows that these dollar prices tend to be sticky—that is, these dollar prices are far more stable than exchange rates. For non-U.S. economies, therefore, a depreciation of their currency relative to the dollar leads to almost a one-to-one increase in the price of imported goods in their own currency and, therefore, the pressures on inflation are high. On the other hand, because dollar prices of traded goods are relatively stable, the inflationary pressures on the U.S. economy are weak.

Pointer from Timothy Taylor.

It is as if there has been a bottom-up decision to stabilize the purchasing power of the dollar. That consensual hallucination makes U.S. monetary policy less effective at wiggling the inflation rate.

Later, she says,

we instead explored the role of value-added taxes and payroll subsidies or, more specifically, raising value-added taxes and cutting payroll taxes. What we found, surprisingly, is that this form of intervention did extremely well in mimicking the outcomes of a currency devaluation, not approximately but exactly.

The point is that a country like Italy or Greece is not trapped by being in the euro. It could increase its competitiveness by raising value-added taxes on consumption and cutting payroll taxes.

I recommend the entire interview. I do not buy everything she says, but it is all interesting.

9 thoughts on “Gita Gopinath on Trade and Exchange Rates

  1. If there is a bottom-up source of inelasticity in the dollar’s real purchasing power, then one plausible interpretation is that in the current global economy, that’s something like a free lunch for the currency issuer. That is, there are now apparently actors willing to absorb some costs of preventing money printing / deficit spending from unleashing more inflation.

    Maybe a metaphor could be a slowly recharging buffer solution that prevents changes in the pH level right until you titrate past its capacity for more absorption, after which the acidity can change abruptly.

  2. Watching the Great Recession, it almost feels like the Fed has no effect on the US inflation rate and the globe. Even the Don Corleone of commodities, Oil, appeared to lose to the Great Recession in 2014.

    1) I do tire of Emerging markets complaining about the US monetary policy as we are doing what is best for us. Like it or not, the outsourcing of China and India has impacted US wages and is probably one of the reasons for Trump. Although China manufacturing has (yet?) not lost much to US on-shoring, I suspect India growth in this area has stagnated as India wages are catching up to US wages and diminished productivity. (Our office has on-shored and there are more company announcements.)
    2) After 2008, I am surprised that more nations trading with their currencies especially with China. It appears they still really fear floating rates. (Maybe Trump may cause a change.)
    3) With Italy, I do wonder how much falling birth rates are making their debt crisis worse. (Not the primary reason but making the government debt worse as it is near impossible to increase GDP with falling populations.)
    3a) I guess the biggest question for these economies is how do you working class decrease wages and increase family size at the same time? (And libertarian economist are not allowed to complain about religious culture.)

    Probably the main reason why US citizens are fearing Big Inflation is because we haven’t seen 6% or higher inflation for 35 years. (Even with the gold bug stuff from 2009 – 2013.) Of course with Trump there may be changes with all the scares on trade, Middle East strife and labor shortages. The second term Obama inflation was controlled by falling commodity prices :& free trade.

    • First off, I reserve the right to complain about anything at any time.

      1) All the academics that I heard (n~3) that track fundamentals of election projecting predicted a switch from the incumbent party. So there doesn’t even need to be a “reason” for Trump other than Hillary was no Ron Reagan as a candidate. And Obama probably benefitted when he took office from falling wages and the hope and change never materialized. So he was no Reagan able to deliver George Bush senior knock-on effects.

      • I think most people assumed the fundamentals expected a close election and looked 50/50ish back in January. And that HRC turned out to be a poor candidate in which e-mails hurt a lot more than assumed. Many experts noted the Comey letter was a key deciding factor here so relates back to e-mail. (Trump really should take note on this with his business conflicts.) Additionally, the Ds should have been more careful on the Rust Belt because Obama’s Auto Bailout did a lot to protect him in 2012 reelection.

        • The point was that all else equal, the out-of-the-presidency party captures the White House after 2 incumbent terms. It is hard to tell what is noise around that expected outcome.

        • In terms of Presidents, I find it ironic that their success or failures are more written in history instead of their performance. Like the main difference between Obama and Jimmy Carter was Obama sent an extra helicopter to the Bin Laden raid. Or the difference of Bush Jr. and Reagan was Reagan won in 1980, a lowpoint in Post-War USA, and Bush Jr. won 2000 at the highpoint of USA in the last 75 years.

          • OTOH, my dad was extremely worried (partly irrationally so) 2 years ago that Hillary would be elected. I told him we would never elect her. He said “who would stop her?” My anwer was “a ham sandwich.”

            While I did sweat it out for a couple weeks in there the bottom line was she was not a a candidate capable of reversing history or overcoming her own baggage. It is scary that there was absolutely nobody else they could run. We need a better system.

          • Well in 2014 he had good reason to be worried but history was not in the Clinton favor.

            1) Again, the e-mail hurt worse than Ds assumed
            2) It feel like HRC and her husband suddenly got old and lost their abilities.
            3) HRC did a poor job of defending the last 25 years. Instead of talking about some of the improvements under Obama or the fact her husband’s years were a Golden Age, she campaigned on creating child programs in Arkansis in 1970s.
            4) I don’t know how the primary could be any different. There was four candidates and really only Sanders impacted voters. (O’Malley sound good but won 1% in Iowa and Webb had good ideas but never seriously ran.) HRC was popular with liberals in 2014 & 2015 and Sanders was too liberal for a lot of voters.

  3. Is that good or bad from the typical objective of inflationary growth? Do we still import more raw materials than finished goods? Does the sign flip as we import more finished goods?