One explanation I have read for the resistance of the dollar to inflation is that it is "exported" meaning that excess dollars go abroad and foreign use of the dollar increases, thus preventing the dollar from inflating domestically.

I don't understand the rationale here. Why should dollar printing result in greater adoption of the dollar in foreign markets? I would think the two would be independent variables.

One possible explanation is that the relationship is actually the REVERSE: foreign adoption causes printing. In other words, what may happen is that foreign countries increasingly adopt the use of the dollar and the Federal Reserve reacts by producing more dollars.


You are correct in thinking that greater dollar printing does not necessarily result in greater adoption of the dollar. However, that is not the point in the explanation you have read.

The point there is that compared to another currency the dollar is more resistant to inflation from printing than others are, because there is more foreign demand for dollars than there is foreign demand for other currencies.

More dollars only lead to inflation in the U.S. if the dollars are actually there, otherwise they may just as well not have been printed as far as the domestic market is concerned. Since the dollar is a famous reserve currency and is held in significant amounts in many other contries, the relationship between dollar printing and inflation is different compared to other currencies.

A numerical example might illustrate the point:

Assume 1000 units more of a domestic currency lead to a 10% increase in inflation in that country. This is true for all countries in our example.

If e.g. Mexico prints 1000 pesos then all of those pesos will stay in Mexico (no foreing demand). So inflation in Mexico will be 10%.

If the U.S. prints 1000 dollars, 500 of those go abroad. So the U.S. has 500 more dollars domestically. So inflation will be 5%.

So if the U.S. prints 1000 units of currency inflation is 5%, but if Mexico prints 1000 units of currency, inflation is 10%. In conclusion the U.S. has a different, relationship of printing to inflation. Specifically it has less inflation, i.e. is more resistant to inflation compared to other countries.

  • $\begingroup$ Yes, I understand the concept, but the analysis I read said that as dollars have been printed the proportion held abroad has increased and the suggestion was that was causal somehow. So, for example, if there are 20% of all dollars abroad, then they do QE3 and then 30% go abroad. The question is why this should be the case. Why would the world absorb a greater proportion of dollars as more are printed. $\endgroup$ Oct 11 '15 at 13:52
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    $\begingroup$ I see. Maybe you should provide a link to the article then. I cannot think of a reason why it should be causally implied that an increase in dollars should increase the percentage that go abroad. Nonetheless however, it is true that the dollar is more resistant to inflation as I said, but not immune or not increasingly more resistant the more is printes as your article apparently implies. $\endgroup$
    – BB King
    Oct 11 '15 at 15:47

In analysing the correlations between money and inflation, it is important to differentiate between narrow money (like MB) and broad money (like M3).

In 2008, the US monetary base did a "hockey-stick" (it grew very rapidly). But M3 (broad money) grew very gradually. This was because a lot of broad money was being destroyed by the financial crisis.

In certain economic circles this has left many confused...they saw rapid growth in base money but not a correlating rate of inflation. It did not make sense and the "exporting inflation" argument became popular to explain this by inflation hawks (it is not a bad theory but doesn't tell the whole story).

On the other hand, some economists and journalists argued that this was proof that monetary considerations were not important for inflation.

Both are incorrect, as monetary considerations are still very important in determining inflation...you just have to properly define money. Much of the money that flows through the economy is not paper dollars...but bank deposits. So it is apt to consider bank deposits (broad money) when trying to correlate inflation to the money supply. This is why the US did not need to export dollars to see inflation rise minimally while base money spiked up sharply.


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