Alternative Views Of Exchange-Rate Determination

The foreign-exchange value of the U.S. dollar has fluctuated widely since fixed exchange rates were abandoned in the early 1970s. The variation in exchange rates under the regime of flexible (floating) rates has been a matter of concern to policymakers because of the fear that uncertainties could have deleterious effects on world trade. Large changes in exchange rates are also thought to have significant impacts on the level and composition of U.S. production by changing the relative prices of exports and importcompeting goods. Some analysts attribute a substantial part of the current U.S. recession to the impact of the recent rise in the exchange value of the dollar on the manufacturing sector, which exports 20 percent of its output. A stronger U.S. dollar, on the other hand, has a beneficial effect on U.S. inflation in the short run by reducing the domestic prices of imports.'