Much Ado About Something Important: How Do Exchange Rate Movements Affect Inflation?

27 Pages Posted: 5 Aug 2016

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: September 2016

Abstract

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.

Suggested Citation

Forbes, Kristin J., Much Ado About Something Important: How Do Exchange Rate Movements Affect Inflation? (September 2016). The Manchester School, Vol. 84, Issue S1, pp. 15-41, 2016, Available at SSRN: https://ssrn.com/abstract=2818778 or http://dx.doi.org/10.1111/manc.12159

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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