It’s a Lagged World
Mainly because the effects of a strong dollar on trade, while they can be powerful, take a long time to materialize.
In international macroeconomics, one of my home academic fields, the general view — shaped in large part by the effects of a rising dollar in the early 1980s, then a big fall after 1985 — has been that the negative impact of a strong dollar on the trade balance takes two years or more to fully manifest.
Following that theory, here’s a plot of a measure of the average value of the dollar against other major currencies, adjusted for inflation, versus the real trade deficit as a percentage of G.D.P., in which I’ve lagged the exchange rate by eight quarters:
So does the Fed need to do more, or has it already done too much? It’s a judgment call.
Over the past year, optimists like me were wrong, while pessimists were right. But past results are no guarantee of future performance.
Paul Krugman 28 October 2022
https://www.nytimes.com/2022/10/28/opinion/fed-inflation-interest-rates.html
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