January 11, 2002

We find it ironic that the euro critics fault ECB Chairman Duisenberg for his supposed disregard of the falling euro. He is criticized for focusing on European prices. But that is precisely what a domestic price rule does. It focuses on stabilizing domestic prices. Contrary to the belief that the country with the depreciating currency should have the higher inflation rate, that is not the case with Euroland. The decline in the euro is due to a decline in rates of return relative to the rest of the world. In other words, due to a real exchange rate or terms of trade effect. (full article attached)

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