Inflation and the Exchange Rate Regime
Is a regime of fixed or of flexible rates more conducive to inflation? In a flexible rate regime the authorities of each country can choose whatever rate of inflation they wish. In the fixed rate system countries can depart from the world rate of inflation by running payments imbalances and will trade-off the costs of accommodating borrowing or lending against the benefits from getting closer to their desired inflation rates; inflation rates are then determined in a general equilibrium system where countries “trade” their surpluses and deficits. “Inflation-prone” countries are distinguished from the “inflation-shy”. Account is also taken of the special case of the reserve currency country.
KeywordsInflation Rate Exchange Rate Regime Monetary Authority Reserve Currency Flexible Rate
Unable to display preview. Download preview PDF.
- Branson, W.H.: Monetarist and Keynesian models of the transmission of inflation. American Economic Review, Papers and Proceedings 65, No. 2, 115–119, 1975.Google Scholar
- Caves, R.E.: Looking at inflation in the open economy. Harvard Institute of Economic Research Discussion Paper No. 286, March 1973.Google Scholar
- Fried, J.: Inflation-unemployment trade-offs under fixed and floating exchange rates. Canadian Journal of Economics 6, No. 1, 43–52, 1973.Google Scholar
- Krause, L. & Salant, W. (eds.): Worldwide Inflation. Brookings Institution, Washington (forthcoming).Google Scholar
- Mundell, R.A.: Monetary Theory. Goodyear Publishing Co., Pacific Palisades, 1971.Google Scholar
- Mundell, R.A.: The optimum balance of payments deficit. In E. Claassen and P. Salin (eds.), Stabilization Policies in Interdependent Economies. North-Hol- land Publishing Co., Amsterdam, 1972.Google Scholar
- Turnovsky, S.J. & Kaspura, A.: An analysis of imported inflation in a short-run macro-economic model. Canadian Journal of Economics 7, No. 3, 355–380, 1974.Google Scholar