Can somebody give me some insight on the workings of inflation between two countries whose currencies are traded at a fixed rate?
If there are two countries whose exchange rates are officially locked (e.g., the U.S. dollar and the Saudi Arabia riyal), does inflation in one country automatically occur in the second country at the same exact rate?
Taking the SAR example, everybody knows that inflation in the U.S. has been about 2-3% per year for the last few years. But occasionally I read that inflation in Saudi Arabia is "essentially zero," even though that country's currency has been locked to the dollar at 1USD=3.75 SAR since 1986.
My best answer would be that it would have to do with what's causing the inflation. For instance, if you have some supply-side inflation with the price of oil going up, this would induce inflation in the US, but not necessarily in Saudi.
But there's a limit to this independence, I think. I suspect for the most part the currencies are locked?
2006-09-02
22:04:57
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3 answers
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asked by
Zowzooma, the Angry Deity
2
in
Economics