Details

Autor(en) / Beteiligte

• Kyer, Ben L.
• Maggs, Gary E.

Titel

Inflation and the Exchange Rate: The Role of Aggregate Demand Elasticity

Ist Teil von

• International advances in economic research, 2016-02, Vol.22 (1), p.1-9

Ort / Verlag

New York: Springer US

Erscheinungsjahr

2016

Link zum Volltext

Quelle

Business Source Ultimate

Beschreibungen/Notizen

• This paper examines the effect of aggregate demand elasticity on the exchange rate when inflation occurs. We discover that both the source of the inflation, whether demand-pull or cost-push, and the elasticity of aggregate demand with respect to the price level, are of consequence for the exchange rate. We obtain two primary conclusions. First, the effect on the exchange rate of cost push inflation is ambiguous and is partially determined by the price level elasticity of aggregate demand. In particular, and assuming that the two examined countries have equivalent aggregate supply elasticities, we conclude that the nation with the less elastic aggregate demand function will see its currency appreciate relative to the other. Second, demand-pull inflation results in an unambiguous increase in the exchange rate but the size of that increase is partially a function of aggregate demand elasticity. Assuming again that two countries have equivalent aggregate supply elasticities, that country with the more elastic aggregate demand will experience currency appreciation.