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How the exchange rate regime drives inflation


This graph shows inflation rates for some of the countries that founded the euro zone. The sample period encompasses three exchange rate regimes: 1. The first is a fixed exchange rate under the Bretton Woods agreement, which allowed some adjustments but ones that were difficult to achieve. The countries’ inflation rates were similar in this period, with occasional exceptions. 2. This system collapsed in 1971 and gave way to a series of exchange rate arrangements with varying membership and success in limiting exchange rate fluctuations. The graph clearly shows that inflation rates varied considerably from one country to the next, which made it difficult to obtain relatively stable exchange rates. 3. Then came the creation of the euro in 1999. A major requirement of membership to this currency union was a low inflation rate maintained within a small range across candidate countries. The graph nicely shows the convergence in inflation rates, which has been maintained to this date. How this graph was created: Search for "Inflation" and then limit the selection in the sidebar by choosing tags: "Nation" (under geography types) and "World Bank" (under sources). Suggested by Christian Zimmermann
View on FRED, series used in this post: FPCPITOTLZGESP, FPCPITOTLZGFRA, FPCPITOTLZGGRC, FPCPITOTLZGITA, FPCPITOTLZGNLD


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