ABSTRACT
The purpose of this paper is to sort out the relationship between inflation and the exchange rate regime. Are fixed or flexible rates more conducive to inflation? The focus is not on the well-known subject of the international inflation transmission process in the fixed rate system, nor on analysing the consequences of given monetary expansions in different countries (a matter much discussed by ‘monetarists') but rather on the outcome of policy adjustments by fiscal and monetary authorities which are designed to bring about whatever transmission of, or insulation from, external inflation these authorities desire. The aim is also to show how the various inflation rates are determined in a fixed rate system when there are many different monetary authorities interacting on the rates chosen by different countries. 2
