Inflation, Exchange Rates and Stabilization
The essay is an extended version of the Frank D. Graham Lecture presented at Princeton University in May 1985. It discusses the interaction of inflation and exchange rate policy in a variety of contexts. Four different settings are used to highlight that role: the experiments with exchange rate overvaluation in the Southern Cone; the place of exchange depreciation in the transition from high to even higher inflation discussed in the context of Brazil; exchange rate fixing and real appreciation during stabilization in the 1920s; and finally the U.S. real appreciation of 1980-85. The common thread of the argument is that exchange rate policy can make an important contribution to stabilization, but that it can also be lead to persistent deviations from PPP, with devastatingly adverse effects.The essay investigates through what channels these PPP deviatiins arise and how they influence inflation, trade and capital flight.
Published: Dornbusch, Rudiger. "Inflation, Exchange Rates and Stabilization." Essays in International Finance, No. 165, (October 1986), pp. 1-24. Internation Finance Section, Princeton, NJ: Princeton University Press.