The Effects of Foreign Inflation on Domestic Prices and the Relative Price Advantage of Exchange Rate Changes

Abstract

Since exchange rate realignments of major currencies in the world in the last few years, major industrial countries have experienced substantially higher-than-average rates of inflation in the 1960's. Consequently, there is considerable interest in the effects of external inflation on domestic prices. Several studies, notably by Branson and Clark, discussed the effects on the U.S. trade account of the exchange rate realignment. The common assumption in these studies is that the increase in import prices relative to domestic prices resulting from a currency depreciation equals the rate of deprecation. While recognizing the weakness of this assumption, they, nevertheless, introduced the assumption in the absence of information on the induced changes in domestic prices.

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