inflation between two pegged currencies?

Question

Can somebody give me some insight on the workings of inflation between two countries whose currencies are traded at a fixed rate?

If there are two countries whose exchange rates are officially locked (e.g., the U.S. dollar and the Saudi Arabia riyal), does inflation in one country automatically occur in the second country at the same exact rate?

Taking the SAR example, everybody knows that inflation in the U.S. has been about 2-3% per year for the last few years.  But occasionally I read that inflation in Saudi Arabia is "essentially zero," even though that country's currency has been locked to the dollar at 1USD=3.75 SAR since 1986.

My best answer would be that it would have to do with what's causing the inflation.  For instance, if you have some supply-side inflation with the price of oil going up, this would induce inflation in the US, but not necessarily in Saudi.

But there's a limit to this independence, I think.  I suspect for the most part the currencies are locked?

NC · Accepted Answer

Inflation has very little to do with exchange rates if the two countries have economies that are structurally different.  It's entirely possible for inflation differential to be underreflected in exchange rates even if there is no pegging.  The Hong Kong dollar and the Japanese yen are the prime examples of that.

Going back to your SAR example, the two causes of inflation are the same everywhere; money supply increases faster than real GDP and/or money velocity increases because households and businesses have inflationary expectations and decrease their cash holdings.

? · Answer

The guidelines of furnish and demand note actual right here basically so if the cost of one forex is largely too extreme it is going to probable be traded a lot less or not in any respect until eventually eventually the cost is decreased. no count number no matter if that is largely too low the paying for and promotion should be extreme and without delay its value should be raised. even nonetheless that really 0.5 the tale. products pass between both countries in change for the money. even as the cost of a particular type of issues in a unmarried u . s . a . of united statesa. deliver forth a lot commerce and accumulation of a lot overseas places currencies in the residing house u . s . a . of united statesa., the bogus value for that forex will drop until eventually eventually the powerful value of the products is larger and commerce will develop into slower. So that is both the availability of overseas places currencies and of handmade products that take area in the bogus value and it relies upon on the volume (on the frequently happening) of each and every of the paying for and promotion to no count number if the bogus value is bodily powerful or about to praise the pass up or down.

Anonymous · Answer

If the peg is only on one currency (like Argentina i suppose before the crack) yes the effect is direct.

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inflation between two pegged currencies?

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