The Dollar and U.S. Inflation: Some Evidence from a Vecm Process

Large fluctuations in the dollar value in recent years rekindled fears of increased U.S. price instability. With monthly data, we employ the cointegration and error-correction modeling technique to examine the nature of the interrelationship between the dollar and U.S. prices in a multivariate setting. The empirical results reveal strong and lasting effects of changes in the dollar exchange rate on U.S. inflation. The results also indicate that money supply exerts a potent and quick impact upon U.S. prices. Therefore, it seems that the Federal Reserve has shouldered much of the responsibility with respect to U.S. price stability in the face of the dramatic changes in the dollar value in recent years.