Together with her research colleagues, Gita Gopinath developed the Dominant Currency Paradigm. Unlike other standard economic models, it takes into account that prices in global trade are predominantly not set in either the producer’s or destination’s currency but are set in dollars. The economists found that when most transactions are dollar denominated, a currency depreciation is rather unlikely to increase exports.
“When you’re in this world of dominant currency pricing, you don’t really see a big export boost that comes immediately after your currency weakens,” says Gopinath.
At the same time, a currency depreciation relative to the dollar leads to an increase in the price of imported goods, which means high pressures on inflation.