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InflationInflation

In: Foreign Exchange

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  • Adam S. Iqbal

Abstract

Inflation and inflation expectations play an important role in FX determination. We studied why in Chap. 3. To recapitulate, the idea was that in fixed real FX rate models, higher expected inflation decreases the nominal forward value of a currency to keep its expected real purchasing power unchanged. Whether the spot FX rate strengthens or weakens then depends on the strength of the reaction of the central bank. The currency strengthens if it is larger than the final increase in inflation expectations, plus the change in the risk premium, as described in Sect. 3.5. FX investors must therefore study inflation across countries and form a view on its dynamics as an input into FX price modelling.

Suggested Citation

  • Adam S. Iqbal, 2022. "InflationInflation," Springer Books, in: Foreign Exchange, chapter 0, pages 189-221, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-93555-9_7
    DOI: 10.1007/978-3-030-93555-9_7
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