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Why Has Inflation Remained So Low After the Large Exchange Rate Depreciations of 1992?

Author

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  • Alessandra Amitrano
  • Paul De Grauwe
  • Giuseppe Tullio

Abstract

This article explains why inflation failed to accelerate in industrial countries after the large exchange rate depreciations of 1992–93. The degree of pass‐through from exchange rate changes to inflation is assumed to depend on the degree of openness of the country, on unutilized capacity at home and abroad, on the price of oil and on the wage, fiscal and monetary policies followed by the country after devaluation. Inflation equations are then estimated for consumer and wholesale prices using pooled data referring to 80 episodes of devaluations/depreciations for seven industrial countries during the period 1966–93. The tests show that the macroeconomic policy followed by the country significantly influences the degree of pass‐through and that the 1992–93 episodes do not constitute a break with respect to previous devaluation episodes when inflation accelerated sharply.

Suggested Citation

  • Alessandra Amitrano & Paul De Grauwe & Giuseppe Tullio, 1997. "Why Has Inflation Remained So Low After the Large Exchange Rate Depreciations of 1992?," Journal of Common Market Studies, Wiley Blackwell, vol. 35(3), pages 329-346, September.
    • Handle: RePEc:bla:jcmkts:v:35:y:1997:i:3:p:329-346
    DOI: 10.1111/1468-5965.00065
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    Cited by:

    1. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    2. Chayawadee Chai-anant & Runchana Pongsaparn & Kessarin Tansuwanarat, 2008. "Roles of Exchange Rate in Monetary Policy under Inflation Targeting: A Case Study for Thailand," Working Papers 2008-03, Monetary Policy Group, Bank of Thailand.
    3. Shambaugh, Jay, 2008. "A new look at pass-through," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 560-591, June.

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