Theoretical Approaches to World Inflation in Floating Exchange Rate Regimes

In the previous chapter, we discussed three different approaches to the study of world inflation under a regime of fixed exchange rates. Each of these approaches offers a distinctive view of world inflation, based on specific channels through which inflationary impulses are transmitted from one country to another. It is noteworthy that, despite fundamental differences in assumptions and in methodology, these approaches arrive at broadly similar conclusions. When one leaves the domain of fixed exchange rates, by contrast, the picture is far less clear. This is because a coherent and generally acceptable theory of transmission of price disturbances under exchange-rate flexibility does not exist. Moreover, even if such a theory existed, its literal application to the current regime of managed floating would be highly misleading. Nonetheless, the theoretical apparatus dealing with exchange-rate flexibility and its implications for price level is not quite as empty handed as one might suppose. The discussion in this chapter is guided by an attempt to stitch together a number of different theoretical strands, which will hopefully qualify as, at least, an ‘informed’ view of world inflation in floating exchange-rate regimes.