The central banker's task of keeping inflation just right has become a permanent tussle with the global currency markets. Too weak a currency equals too rapid price gains. Too strong, and disinflation looms.
That's the well-worn argument under the microscope Friday at the Jackson Hole Symposium, the U.S. Federal Reserve's annual policy getaway. Gita Gopinath, a scholar at Harvard University, says that it just isn't that simple.
"The greater the fraction of a country's imports invoiced in a foreign currency, the greater its inflation sensitivity to exchange rate fluctuations at both short and long horizons,'' she says. Because the dollar is by far the dominant currency in world trade, "U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it.''
Her work in this area been cited by the European Central Bank, the prime example of an institution hoping that a weaker currency will spur inflation.
Here's what Gopinath's research means for ECB Governing Council members: since Ireland has to pay for more of its imports in a foreign currency than France, a weaker euro will have a much bigger inflationary impact on Irish consumer prices than French. Officials, who will make their next policy decision on Thursday in Frankfurt, are struggling to end a bout of near-stagnant price growth.
There's another implication, this time of interest to Fed watchers, for whom the question of a September rate increase has become more uncertain. It's that the dominance of the U.S. dollar insulates the world's largest economy from a major price impact through currency swings.
So how does that play out for the monetary guardians gathered at Jackson Hole? The greenback has gained against all but one of its Group of 10 peers this year.
"There's a lot of talk about the dollar appreciation and the consequences of that for inflation,'' Gopinath told her audience on Friday. "What all of this evidence basically tells you is these effects are going to be small. This is not a major impact for a country like the U.S."