What is it about?
This study shows the adoption of a non-free float exchange rate regime need not result in an increase in inflation. The results show the private sector's profitability or value maximization incentives serve to mitigate inflationary pressures if the Central Bank focuses on price stabilization as opposed to price fixing.
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Why is it important?
Most countries around the world operate non-free float exchange rate regimes. Study provides a framework for assessing whether the adoption of a non-free float has resulted in a direct link between inflation and exchange rates or an indirect link that operates via the private sector's responses to exchange rates or financing risk and bankers' response to investment risk. An understanding of the link between exchange rates and inflation is beneficial for policy decisions and private market decisions.
Perspectives
Some small countries around the world attempt to run free float exchange rate regimes, resulting in inflationary pressures because these economies are too small in relation to their trade partners to maintain stability in exchange rates. This paper provides a credible alternative for such small countries.
Dr Oghenovo A Obrimah
Fisk University
Read the Original
This page is a summary of: Can Interactions between Financing and Investment Activities Have Dissimilar Effects on Inflation and Exchange Rates?, African Development Review, March 2015, Wiley,
DOI: 10.1111/1467-8268.12121.
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