Theoretical Approaches to World Inflation in Fixed Exchange-Rate Regimes

Abstract

Most of the inflation literature was developed to deal essentially with closed economies. However, the simultaneity of rapid inflation in many countries during the late 1960s led to an increasing awareness that any comprehensive theory of price-level behaviour must account for its international character. The analysis of inflationary process becomes increasingly complex as one ventures beyond the domain of closed economies, since there arises the need to specify clearly the international transmission of price and other macroeconomic disturbances. Such a task requires the incorporation of balance of payment considerations and the nature of the exchange-rate regime into the analysis. In this chapter, we examine the major contributions to the theory of inflation in open economies with a fixed exchange rate, with a focus on (a) the channels of transmission by which inflationary impulses in one country are propagated to a nucleus of open economies bound together by a network of trade and capital flows, and (b) the systematic factors, if any, that determine the world rate of inflation.