June 25, 2007

If the U.S. and the rest of the world essentially follow a price rule, exchange rate fluctuations will reflect things other than the relative inflation rate. Fluctuations will reflect the real return differential across countries. The current U.S. economic slowdown points to a lower real rate in the U.S. While suggestive, that information alone is not enough to determine the relative performance of either the U.S. economy or the exchange rate. In order to do so, we need to establish whether the rest of the world is slowing faster than the U.S.

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