The Mystery of US Inflation and US Dollar Appreciation

Haotian Jia ()
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Haotian Jia: College of Economics Shenzhen University

A chapter in Proceedings of the 2025 4th International Conference on Public Service, Economic Management and Sustainable Development (PESD 2025), 2025, pp 71-78 from Springer

Abstract: Abstract In the post-pandemic era, against the backdrop of high inflation in the United States, the U.S. dollar exchange rate did not depreciate as predicted by the purchasing power parity (PPP) theory due to the decline in purchasing power. Instead, it experienced a significant appreciation. This paper reviews the determinants of exchange rates and, combining real-world data, explains the phenomenon of simultaneous decline of USD’s purchasing power and its appreciation against other currencies from 2021 to 2022 through factors such as purchasing power parity, interest rate parity, international capital flows, and macroeconomic policies. The study finds that due to the impact of the pandemic, the supply of U.S. products decreased, while the government implemented expansionary fiscal policies, leading to increased demand, resulting in domestic depreciation. At the same time, the Federal Reserve adopted interest rate hikes to curb inflation, leading to the rise in the U.S. dollar exchange rate. Through the analysis of the U.S. exchange rate, this paper supplements the understanding of how factors influencing exchange rate movements interact in practice.

Keywords: Exchange Rate; Inflation; Purchasing Power Parity; Monetary Tightening (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-916-2_9

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DOI: 10.2991/978-94-6463-916-2_9

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