0

So one would normally think that when the US dollar marginally depreciates relative to another currency, say the Ghanaian cedi, that the cedi would appreciate in response. However, look at this Khan Academy definition of R.E.R. (in the formula posted below). Here if US CPI is higher relative to Ghana's CPI, the dollar appreciates relative to the cedi when US inflation just increased. The way I understand it is that now with the higher US inflation, it now takes more cedis to purchase the same amount of US dollars as before. However, I'm not sure how to reconcile the two definitions. Does inflation in USD, all else held equal, cause the USD to depreciate or appreciate in relation to the cedi?

R.E.R. of USD = (other currency per dollar) x ((Price Level of US)/(Price Level of Other Country))

2

The RER is not directly related to how many GHS it takes to buy a USD.

It’s comparing how many GHS you would need to buy a basket of items in Ghana vs. a similar basket of items in the USA.

So if there is more inflation in the US than in Ghana it takes more dollars to buy that same basket of goods, so the GHS is more valuable in relation to the dollar, regardless of the nominal exchange rate (which is influenced by interest rates and other factors).

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.