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Much Ado about Something Important: How do Exchange Rate Movements Affect Inflation?
Author(s) -
Forbes Kristin
Publication year - 2016
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12159
Subject(s) - economics , inflation (cosmology) , exchange rate , monetary policy , monetary economics , macroeconomics , inflation targeting , affect (linguistics) , interest rate , real interest rate , central bank , keynesian economics , psychology , physics , communication , theoretical physics
Understanding how exchange rate movements ‘pass‐through’ to prices and inflation is critically important for monetary policy. Yet key tenets of our standard framework for analyzing this ‘pass‐through’ have recently not performed well in the UK. Instead, a new framework is needed—of incorporating the cause of the exchange rate movement when analyzing its effects. This new framework can explain why sterling's movements have had such different effects on import prices and inflation over time. It should also improve the ability of central banks to predict inflation and set monetary policy appropriately.