Tuesday, January 8, 2008

Predicting Inflation and Exchange Rates

Predicting inflation is a very important task for Economists. Future forecasts of inflation are used to determine current monetary policy. If inflation predictions are wrong it can cause inappropriate monetary policy, resulting in either inflation or recession. Although economists may look at various economic data, there is no foolproof method for predicting inflation. Generally speaking inflation is easier to predict and less volatile when inflation rates are low. As inflation increases it also becomes more volatile and harder to predict.

Predicting Exchange Rates

Predicting exchange rates is even more difficult as speculation and market sentiments play a greater role in determining equilibrium prices. Exchange Rates are very important for exporters and economies reliant on trade. Many investors seek to make a living through predicting future exchange rate fluctuations. Apart from the role of speculation, the most significant factor is interest rates and economic growth.

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