The Exchange Rate and Inflation

Recently, in an unpublished paper, Peter Hooper and Barbara Lowery of the Fed staff reviewed the main papers on the question of the relation-ship between the foreign exchange value of the dollar and the price level. Hooper and Lowery standardized the results of all of the papers to the Fed's multilaterally weighted index of the exchange rate covering ten countries. We do about half of our trade with those countries and they account for about two-thirds of world trade. They drew a consensus from the papers that a 10% depreciation in the real effective rate, which is the average change in the rate adjusted for changes in consumer prices here and abroad, leads to a 1.5% to 1.75% increase in the U.S. consumer price index within 2-3 years with about half of the impact coming in the first year...What about 1979? Which way will the realeffective rate go? Obviously the question is extremely difficult to answer. Let us focus on events abroad, excluding developments in the United States which is the concern of the committee.