Inflation and exchange rates: Evidence and policy guidelines for the European community

Abstract

The paper, which is a summary of the so-called OPTICA-report, sponsored by the Commission of the European Communities, argues that changes in the exchange rates of EC member currencies during the period between the early 1960s and the mid-1970s predominantly reflect inflation differentials. The correspondence is sufficiently close, when wholesale price indices are used to express national inflation rates and PPP is measured in terms of effective exchange and inflation rates, to justify a PPP-based intervention rule as the main criterion for managing the individually or jointly floating EC-currencies.