Formula for Expected Nominal Depreciation Between FlexIT Economies
In a long-run equilibrium where two FlexIT economies successfully meet their respective inflation targets ( and ) and the real exchange rate is stable, the expected rate of nominal depreciation () of the higher-inflation currency against the lower-inflation one is equal to the difference between their inflation targets. The formula is: For example, between South Africa () and the US (), the expected depreciation of the rand against the dollar is 2.5%.
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Formula for Expected Nominal Depreciation Between FlexIT Economies
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Formula for Expected Nominal Depreciation Between FlexIT Economies
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Imagine two countries, A and B, both have economic systems where their central banks successfully maintain inflation at a stable, publicly announced target over the long term. Assume the real exchange rate between their currencies remains constant. If Country A's inflation target is 5% and Country B's inflation target is 2%, what is the expected long-run change in the nominal value of Country A's currency relative to Country B's currency?
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Consider two economies, Country X and Country Y, that both operate under a system where their central banks successfully maintain stable, publicly announced inflation targets over the long term. The real exchange rate between their currencies is assumed to be constant. If Country X has an inflation target of 6% and Country Y has an inflation target of 1%, then the currency of Country Y is expected to depreciate by 5% annually against the currency of Country X.
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