Exchange rates and conflict inflation theory

Guilherme Spinato Morlin

Chapter 8 in Central Banking, Monetary Policy, and Exchange Rates, 2026, pp 147-168 from Edward Elgar Publishing

Abstract: This chapter examines the relationship between exchange rates and conflict inflation in open economies from a post-Keynesian perspective. We analyze how exchange rates influence prices and distribution through multiple channels: imported inputs, consumption goods, and price-setting in tradable sectors. Building on the Classical-Keynesian approach, we develop a theoretical framework that captures the distributive dynamics between workers and capitalists in price-taker open economies, showing how exchange rates interact with distributive conflict. Our model reveals that exchange rate devaluations can intensify conflict inflation when workers resist real wage reductions through nominal wage claims. We show how the frequency of nominal adjustments, an expression of bargaining power, shapes both equilibrium inflation and distribution. We conclude that while monetary factors determine the nominal exchange rate, the real exchange rate results from the interaction of monetary policy and distributive conflict, with significant implications for distribution in open economies.

Keywords: Open Economy; Post-Keynesian Economics; Income Distribution; Balance of Payments; Monetary Policy; Real Exchange Rate (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035330041
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