Imported inflation and monetary policy. A comment

Abstract

In their article Imported inflation and monetary policy, I.O. Scott and W.E. Schmidt criticise the argument that monetary policy cannot be used as a weapon against inflation in a surplus country under a regime of fixed exchange rates. The present note examines their criticism and finds it wanting in several respects. The author argues that the “external constraint” is a significant barrier to the imposition of tight money in a surplus country - unless the supply of foreign capital is inelastic from a very early stage, which would be unusual. Moreover, the larger and more persistent the overall surplus, the greater the eventual risk of “internal constraints” becoming operative as well, thus putting another limitation on monetary policy at a subsequent stage.

JEL: E31, E42, E52