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Why Has Inflation Remained So Low After the Large Exchange Rate Depreciations of 1992?[Note 1. Paul De Grauwe is Professor of Economics at the ...]
Author(s) -
Amitrano Alessandra,
De Grauwe Paul,
Tullio Giuseppe
Publication year - 1997
Publication title -
jcms: journal of common market studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.54
H-Index - 90
eISSN - 1468-5965
pISSN - 0021-9886
DOI - 10.1111/1468-5965.00065
Subject(s) - economics , devaluation , inflation (cosmology) , monetary economics , exchange rate , openness to experience , exchange rate pass through , psychology , social psychology , physics , theoretical physics
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.