ABSTRACT
Many developing countries have argued that part of the inflation they experience is necessary if they want to ‘catch up’. That argument can be supported by the Harrod-Balassa-Samuelson theory. Unbalanced growth leads to dual inflation which, in turn, induces real exchange rate appreciation (measured in CPI terms). In the case of a fixed exchange rate – or, more generally, if the movements in the real exchange rate are not fully compensated by movements in the nominal exchange rate – this will be reflected in higher inflation for higher growth countries.
