Chapter 31

The Exchange Rate and the Rest of the World Inflation

Abstract

In this chapter, we continue our .quest by focusing on determining the relevant proxies for the money and goods variables that best explain the underlying inflation rate and exchange rate of a particular country or area. The second part of the chapter provides some estimates that allow us to indirectly test our hypothesis by focusing on the explanatory power and goodness of fit of the different specifications. Depending on the organization of the US monetary system, the foreign fluctuations in the demand for money will impact the US inflation rate. In fact, we argue that keeping track of the rest of the world’s use of dollars may be an arduous task for individual investors ...

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