Nominal exchange rates fluctuate substantially and often seem unrelated to short-run movements in such fundamentals as income or trade balances. Nonetheless, certain long-run relationships involving exchange rates may be reliable. In particular, many economists view exchange rates as responding to differences in price levels. However, exchange rates may take more time to respond fully to price-level differences than once was thought. Since 1971, U.S. inflation rates have usually been higher than Germany's or Japan's and the dollar has weakened against both the mark and the yen.
Suggested citation: “International Developments,” Federal Reserve Bank of Cleveland, Economic Trends, no. 96-08, pp. 18-19, 08.01.1996.