EFFECTS OF EXCHANGE-RATE VARIABILITY ON INFLATION VARIABILITY

Previous studies have postulated that there exists a positive relationship between the rate of inflation and its variability. They have shown that a high inflation rate contributes to inflation variability. In this paper, we argue that with the current floating exchange rate system, exchange rate variability is another factor contributing to inflation variability. After incorporating a measure of exchange rate variability into a simple model used by previous authors, we estimate our model using cross-country data from 20 developed and 76 less developed countries. The cross-sectional regression results support our conjecture. © 1991.