Effects of exchange-rate variability on inflation variability: some additional evidence

Abstract

This study re-examines the hypothesis that exchange-rate variability is another factor contributing to inflation variability. The analysis uses cross-country data for 41 countries over the current floating exchange-rate era. It employs the instrumental variable estimator, Emery's (1993) specification suggestions, centering of data technique and a longer and more recent sample period (1973Q1–1990Q4). The empirical evidence supports the above hypothesis and strengthens the case for stable exchange-rate policies.