Variations in exchange rates and inflation in 82 countries: an empirical investigation

Abstract

In this paper, we examine the hypothesis that nominal exchange-rate variability can have a positive and significant effect on the variability of inflation, when the statistical relationship between the variability of inflation and its mean rate is estimated for the 1973Q2–1998Q1 period. The analysis employs cross-country data for 82 countries over the current floating exchange-rate era. It employs the instrumental variable estimator, so as to obtain consistent estimates and the Newey–West estimator to account for non-spherical residuals. The empirical evidence supports the hypothesis.