First of all, talk about the negative correlation between inflation and exchange rate. According to the purchasing power parity theory, the currency of a country with high inflation level is bound to depreciate relative to that of a country with low inflation level. However, the purchasing power parity theory has two shortcomings. First, it assumes that goods can be traded freely, regardless of transaction costs such as tariffs, quotas and taxes. The second is that it only applies to goods, but ignores services, which may have a very obvious value gap.
The negative correlation between inflation and exchange rate is mainly due to the relationship between real exchange rate and nominal exchange rate. Suppose there are two countries, country A and country B. The currency of country A is X, and the currency of country B is Y. The inflation level of country A is higher than that of country B. We assume that the inflation rate of country A is 20%/ year and that of country B is 0%/ year. At present, the exchange rate of X to Y is 1: 5. If there is a commodity M, in the first phase, the price of country A is 20 units of X, and the price of country B is 1 10 units of Y, then according to the nominal exchange rate, when M is imported from country A, as long as 100 units of Y is replaced by 20 units of X, the commodity M can be obtained at a lower price than that in China. With inflation, after 1 year, the price of commodity M in country A becomes 24 units of X, while the price in country B remains unchanged, which is still 1 10 units of Y. Suppose the exchange rate changes back to X: Y = 1: 5 in1. It is necessary to exchange 120 units of Y for 24 units of X, so that the price of imported M is higher than the domestic price, but on the other hand, it becomes profitable to import M from country A to country B, because only 22 units of X are needed.
The following is the calculation method of real exchange rate: real exchange rate = nominal exchange rate * p/p, where p is the price level of foreign goods in foreign currency and p is the price level of domestic goods in local currency. In the above example, the actual exchange rate of X: Y in the first period is E * = 5 * 20/1/kloc-0 = 0.909, and that of X: Y in the second period is E * = 5 * 24/10 =/kloc-. When the inflation level of foreign countries is higher than that of their own countries, * p/p is greater than 1, and the real exchange rate of foreign currencies will rise, thus stimulating the export of domestic commodities and making the domestic currency appreciate. When the domestic inflation level is higher than that of foreign countries, * p/p is less than 1, the real exchange rate of foreign currency drops, which stimulates domestic imports and devalues the local currency.
The above is the negative correlation between inflation and exchange rate, but usually the occurrence of inflation will make the central bank of the country formulate strict monetary policy, usually in the form of high interest rates. In the free flow of international capital, if the domestic interest rate is higher than that of foreign countries and there is a spread, it will attract a large influx of capital, thus pushing up the domestic exchange rate.
In fact, in the final analysis, this is a question of trade account and capital account. If the capital inflow exceeds the trade deficit, the currency can still appreciate steadily, just like the United States and Britain. Looking back at Japan, this country can best prove the limitations of purchasing power parity theory. Japan's deflation in the past 10 years should strengthen the yen. However, the surplus income brought by the decline of the real exchange rate was offset by the liquidity trap caused by Japan's low interest rate policy, which led to the structural outflow of Japanese funds, thus keeping the yen at a low level for a long time. Only when inflation causes changes in the real exchange rate will it affect net exports. It cannot be taken for granted that as long as there is inflation, the exchange rate line will change in a favorable direction, which will lead to an increase in exports.
At a fixed exchange rate.
When the domestic price level increases, the general situation is that net exports will decrease rather than increase. The intuitive explanation is that domestic money can't buy domestic things, but it is more cost-effective to buy foreign things because the exchange rate has not changed. Theoretically, it can be known by using the net export function of IS-LM-BP model.
However, there is also a situation that is just the opposite. If there is a difference in productivity growth between the two countries, then the inflation in the inflation country is due to the rapid increase of productivity in the trade sector, which leads to a general increase in the wage level of the whole society, which in turn leads to an increase in the price level of the whole society. Then the competitiveness of inflation countries will still be enhanced, because the productivity of traded goods will increase faster than the domestic price level, but net exports will increase. Theoretically, it can be explained by weak evaluation of purchasing power.
Under the floating exchange rate, if the capital is illiquid, the nominal exchange rate should be increased when the price level rises in order to maintain the balance of the current account. According to the parity formula, the nominal interest rate should be adjusted to E=P/Pf, and the increase of nominal interest rate just offsets the increase of price level, and exports and imports have no effect. This is the first theorem of the current account balance model.
If capital flows in a limited way, inflation will lead to lower real interest rates, and then capital will flow out. What will happen to exports at this time depends on whether the initial economic situation is deficit, surplus or balance? The initial deficit is subject to depreciation pressure, coupled with the current double depreciation pressure, the exchange rate depreciation is likely to exceed the price increase and export increase. At first, there was pressure for the surplus to appreciate. Now, with the outflow of capital, the pressure is reduced, the exchange rate depreciation does not necessarily exceed the price, and exports do not necessarily increase. The initial equilibrium needs specific analysis.
If capital flows freely and monetary and fiscal policies do not work, there is only one way to go. Please note that the impact of inflation is only passively analyzed here, while monetary and fiscal measures remain unchanged. To make an analogy, we should only consider the process of "seeing the trees but not the forest", not the result, and how capable inflation is to be exported to Kan Kan. In fact, monetary and fiscal means will be used to control the exchange rate before it changes drastically.
In short, the promotion of inflation to exports is not obvious, and it needs specific conditions. Even if the conditions are met, it is difficult to have the opportunity to use them (subject to other more efficient economic means).
There are many reasons for the increase in exports, which may be some domestic policies to encourage exports (such as export subsidies and tax inclination), or the increase in foreign demand (consumers change their preferences, enterprises transform and leave market space, etc.). ), or the competitiveness of products has improved (such as economies of scale reducing costs, technological progress improving quality, etc.). ).
Before the exchange rate changes, a country's high inflation will lead to high imports, not high exports as the landlord said: from the micro-decision theme, a country's high inflation means that goods are more expensive than other countries, domestic importers are more willing to import, and foreign exporters are more willing to export goods to the country. This situation will continue until the country's currency depreciates to an equilibrium level (regardless of the impact of artificial tariffs or other trade barriers). In other words, inflation leads to an increase in net imports, an increase in the demand for foreign currency in the foreign exchange market, and a tendency for the local currency to depreciate. In short, the devaluation of the local currency caused by inflation is the result of market choice.