Password Please enter your Password. Forgot password? Don't have an account? Sign in via your Institution. You could not be signed in, please check and try again. Sign in with your library card Please enter your library card number. Show Summary Details Overview imported inflation.
Reference entries imported inflation in A Dictionary of Economics 3 Length: 70 words. All rights reserved. In fact, it is argued that low-priced exports from China resulted in low inflation over the years in the developed world, which allowed central banks such as US Federal Reserve to keep interest rates low for too long leading to an asset price bubble in the real estate market. Should central banks react to inflation going up or coming down because of price movement in the globally traded commodity?
It is prudent on the part of the central bank to take imported inflation into account in policymaking as it affects the inflationary expectations in the country. RBI raised interest rates when oil prices were rising before the financial crisis of The Federal Reserve also raised interest rates in the s to fight inflation when it was primarily driven by rising energy prices in the international market.
If the central banks decide not to intervene because of the imported nature of inflation, inflationary expectations will drive prices to much higher levels at which the central banks may lose control of the situation. Never miss a story! Stay connected and informed with Mint. Download our App Now!! It'll just take a moment. When this scenario is multiplied by millions of transactions, currency moves can have a drastic impact on a country's imports and exports. Inflation and interest rates affect imports and exports primarily through their influence on the exchange rate.
Higher inflation typically leads to higher interest rates. Whether or not this results in a stronger currency or a weaker currency is not clear. Traditional currency theory holds that a currency with a higher inflation rate and consequently a higher interest rate will depreciate against a currency with lower inflation and a lower interest rate.
According to the theory of uncovered interest rate parity , the difference in interest rates between two countries equals the expected change in their exchange rate. So if the interest rate differential between two different countries is two percent, then the currency of the higher-interest-rate nation would be expected to depreciate two percent against the currency of the lower-interest-rate nation.
However, the low-interest-rate environment that has been the norm around most of the world since the global credit crisis has resulted in investors and speculators chasing the better yields offered by currencies with higher interest rates. This has had the effect of strengthening currencies that offer higher interest rates. Of course, since these investors have to be confident that currency depreciation will not offset higher yields, this strategy is generally restricted to the stable currencies of nations with strong economic fundamentals.
A stronger domestic currency can have an adverse effect on exports and on the trade balance. Higher inflation can also impact exports by having a direct impact on input costs such as materials and labor. These higher costs can have a substantial impact on the competitiveness of exports in the international trade environment.
This report is released monthly by most major nations. The U. Department of Commerce and Statistics Canada , respectively. These reports contain a wealth of information, including details on the biggest trading partners, the largest product categories for imports and exports, and trends over time. Fiscal Policy. Advanced Forex Trading Concepts. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Key Takeaways A country's importing and exporting activity can influence its GDP, its exchange rate, and its level of inflation and interest rates.
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