The possibility that some Gulf states, particularly the United Arab Emirates, might abandon their long-time pegs to the dollar has been getting increasing attention recently (for example, from Feldstein and, especially, Setser). It makes sense. The combination of high oil prices, rapid growth, a tightly fixed exchange rate, and the big depreciation of the dollar against other currencies (especially the euro, important for Gulf imports) was always going to be a recipe for strong money inflows and inflation in these countries. The economic dynamism — most striking in Dubai — is admirable and fascinating as a longer term phenomenon, but also now clearly shows signs of overheating. Indeed inflation has risen alarmingly, as predicted. Among other ill effects, it is producing unrest among immigrant workers. An appreciation of the dirham and riyal is the obvious solution.
Prospects for Inflation outside America – Guest Post from Menzie Chinn
Menzie Chinn, Prof. of Economics at University of Wisconsin, is guest posting this week:
I want to thank Jeff Frankel for the opportunity to be a guest writer on his blog.
A lot of attention has been devoted to how oil price and food price shocks have affected the US economy, both along the output and price dimensions. A general presumption has been that as long as inflation expectations remain well anchored, then one need not worry about 1970’s style stagflation (recession is another matter).
However, there are many places in the world where inflation expectations are not well anchored. Or at least we can’t tell if they’re well anchored or not. Figure 1 presents data for several key groups (using the IMF classifications): Industrial countries, LDCs excluding oil exporters, oil exporters and developing Asia.
I am going to turn off the “Comment” function on my blog
Since I started this blog, my comment section has been inundated with spam. (I am not talking about bona fide comments, most of which have been intelligent and useful.) The spam has reached 35 per night, and it is time-consuming to go through and delete it all. For some reason, my software can’t filter it out, even though other bloggers don’t seem to have this problem.
Hence, reluctantly, I am turning off the comment function on my blog site. I am sorry about this. Most of my posts will be carried by RGE Monitor, SeekingAlpha or the BCSIA site (though with a delay). Readers may post comments there.
