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A multi-country comparison of the linkages between inflation and exchange rate competitiveness

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  • Steven B. Kamin

Abstract

This paper describes research comparing the response of inflation to changes in exchange rate competitiveness in various regions of the world. The paper first presents evidence that an empirical relationship between the rate of inflation and the level of the real exchange rate, which was documented for Mexico in previous research by the author, holds for a large set of other countries as well. This result may pose a dilemma for policy-makers, since it implies that it may not be possible to achieve low inflation and a high export competitiveness simultaneously. The paper then demonstrates that the responsiveness of inflation to the real exchange rate has been much higher in Latin America than in Asian or industrialised countries. This difference in inflationary responsiveness is not fully explained either by the prior history of inflation or by the extent of openness to foreign trade. It is possible that the lower responsiveness of inflation to the real exchange rate in Asia than in Latin America is what has allowed the Asian countries to remain more consistently focused on maintaining competitiveness and export growth.

Suggested Citation

  • Steven B. Kamin, 1998. "A multi-country comparison of the linkages between inflation and exchange rate competitiveness," International Finance Discussion Papers 603, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:603
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    References listed on IDEAS

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    9. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
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    Cited by:

    1. Kuikeu, Oscar, 2011. "Comment la dernière crise financière a relancé le débat relatif à l'arrimage du fcfa à l'euro [How the recent financial crisis have revived the debate on the parity between fcfa and euro]," MPRA Paper 32077, University Library of Munich, Germany.
    2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2014. "Addicted to Dollars," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 1-51, May.
    3. Joseph E. Gagnon & Jane E. Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
    4. Shaghil Ahmed & Christopher J. Gust & Jonathan Huntley & Steven B. Kamin, 2002. "Are depreciations as contractionary as devaluations? A comparison of selected emerging and industrial economies," International Finance Discussion Papers 737, Board of Governors of the Federal Reserve System (U.S.).

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    Keywords

    Interest rates; Inflation (Finance);

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