5 The results of the different studies differ somewhat, but the overall assessment based on research in this field is that a change in the exchange rate in the short term leads to a change that is half as great in import prices. The research has also shown that the pass-through of exchange rate changes on consumer prices is much less than on import prices. 6 The most obvious explanation for this is that import prices do not constitute the entire consumer price index (CPI), only around one third of it. 7 The fact that the percentage is so low is partly due to several domestic factors (transports, various types of service, and so on) affecting the final price for imported goods charged to the consumer. 8 As the example of the cheese importer showed, there may also  1  This example does not claim to offer a correct description of the Swedish cheese market, but merely serves as an illustration of the effects of changes in the exchange rate on inflation. 2  See, for example, Apel, Friberg and Hallsten (2004). 3  What is known as pricing to market is a reflection of this: in the example we use it would mean that the French exporter determines different prices for different export markets, such as Sweden. This could lead to a reduced tendency to change the price in Sweden as a result of exchange rate fluctuations.
During the recent crisis the currencies in “high interest rate countries” such as Australia and New Zealand weakened substantially against “low interest rate countries” such as Japan and the United States, which once again led to a speedy settlement of carry positions. One contributory factor to the inflows of capital to the emerging markets in Asia and Latin America, as I mentioned earlier, is the relatively low interest rate levels in the “old” industrial nations in North America and Europe. The low interest rates in, for example, the United States, make it profitable to borrow dollars in order to invest in other currencies that provide a higher return at given exchange rates. Several of the countries that are now experiencing capital inflows are unwilling to allow their currencies to appreciate against the US dollar despite the fact that the inflows are creating appreciation pressures. This is understandable in the light of experiences from, for instance, the Asian crisis. Exchange rates can be come highly volatile if they are completely adapted to highly volatile capital flows. But at the same time, the unwillingness to allow the exchange rate to appreciate probably strengthens tendencies towards capital inflows, as it enables speculation in carry trade, as I described earlier. Let me now leave the “speculative” element of the foreign exchange market and talk about the more long-term development of the exchange rate.