ABSTRACT
The degree of confidence with which the long-term speculator can estimate expected future profit may be so weakened and its subjective risk so increased by inflation that long-term forward exchange rates fall into a partial speculative vacuum. If inflation risk appears considerable, monetary and exchange rate policies in France or Germany are unstable, and the world is in the aftermath of an economic shock, the estimation of expected real exchange rate change or expected real interest rate differentials in far-off periods becomes particularly hazardous. Inflation reduces the robustness of speculation based on a belief about the long-run real exchange rate of the franc against the mark. The real exchange rate of, say, the franc against the mark, is sensitive not only to a swing in central bank policy towards inflation which is being effected currently, but also to market expectations of policy in the future.
