(Reuters) - Any appreciation in the U.S. dollar in response to a Federal Reserve rate hike is unlikely to generate major disinflationary concerns in the United States but could create inflationary pressures in other countries, according to a paper presented to a global gathering of central bankers.
That’s because the more a country’s imports are invoiced in a foreign currency, the more sensitive it is to exchange-rate-driven inflation.
In the United States, where the vast majority of imports are invoiced in dollars, a rise in the dollar has muted effects on inflation, wrote Gita Gopinath, a Harvard economics professor known for her research on exchange rates.
The stronger dollar, however, would boost inflation in other countries more vulnerable to exchange rate changes, and these may need to raise their own interest rates in response, according to the research presented Friday at a conference in Jackson Hole, Wyoming.
“A monetary policy tightening in the U.S. that is associated with a dollar appreciation generates inflation in countries that import primarily in dollar-invoiced prices and this may induce them to tighten monetary policy to address inflation concerns,” she wrote. “On the other hand monetary tightening in the periphery has a smaller impact on U.S. inflation through import prices given the dollar dominance of invoicing in U.S. imports.”
With U.S. inflation persistently below the Fed’s 2-percent target, the likely path of inflation is an important concern as policymakers mull when to raise interest rates.
Fed policymakers including Chair Janet Yellen pointed to the stronger dollar earlier this year as one culprit behind lower U.S. inflation even as unemployment dropped. Once the Fed begins tightening monetary policy, the dollar may strengthen further as investors move to take advantage of higher U.S. rates.
The findings add to evidence that internationalization of a nation’s currency can help stabilize inflation, Gopinath said.
Reporting by Ann Saphir; Editing by Andrea Ricci