I’m thinking mainly of the US dollar. Is the inflation rate in the US reflected in other countries which use the dollar or which have currencies pegged to the dollar?
Is this different in the EU, where no one country emits the shared currency?
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Pegging your currency to the dollar is very much like pegging your currency to gold. In fact, they are almost exactly the same. People seem to forget that gold in of itself has inflation and deflation. And for a country that pegs their currency to the USD, they’re saying that their currency is worth x amount of USD just like back “in the day” when you could exchange a USD for its value in gold. And as you probably had a suspicion about, can be VERY bad for an economy. It’s precisely why we’re on a fiat system and not a gold system.
One good example would actually be the different areas of the US itself. Each state has its own cost of living. Living in New York is going to cost a lot more than living in Alabama. Inflation for gas prices in New York will be different from inflation of gas prices in Alabama. Same for housing and such. However, prices for imported goods like iPhones are the same for both places and will face the same rate of inflation because it’s an imported good that isn’t impacted by unique factors like New York and Alabama having very different housing markets or sourcing their gas from refineries in different parts of the country. For a country that pegs its currency to the USD, completely domestically sourced goods and services might not see the same level of inflation. But they definitely will see the same inflation for imported goods.
This can wreck havoc on a foreign economy because they’re subject to the financial policies of the US. And the US’s financial goals are going to be very different from a smaller country with a less diverse industrial base. They wouldn’t be able to do anything to control inflation locally and that can completely destroy their domestic industry. In fact, one of the only reasons the US financial system has been as stable as it is with such a diverse variety of states is the fact that the US government redistributes wealth from wealthy states to less wealthy states. Without this rebalancing, the US would be seeing the Greek crisis plying out extremely frequently and these poorer states completely falling apart. That’s not going to happen for a foreign country pegging their currency to the USD so they are at a very real risk of seeing that same sort of crisis but worse.
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