On imports, with higher inflation, the costs of imported products and services would increase. This means that local consumers and businesses may find it more expensive to buy foreign products.

On exports, at the same time, if our national currency depreciates, our products may become more attractive abroad because they would be cheaper compared to local products in the foreign country.

Should the domestic currency appreciate or depreciate?

As for the direction of our currency, considering the higher inflation and interest rates in our country, it could be more favorable for our currency to depreciate. This means that the value of our currency would fall in foreign currency, which could help our exports to be more competitive in international markets.

In this case, a possible answer would be that our domestic currency could depreciate to help offset the negative effects of inflation and make our exports more competitive.

At times when inflation and the local interest rate are low as opposed to the foreign country, there can be several effects such as imports and exports with the exchange rate and the IFE.

Imports:

When local inflation and interest rates are low compared to the foreign country, the exchange rate of the local currency tends to appreciate according to the foreign currency. Consequently, imports may increase because consumers and companies find foreign products more attractive, as they will have a lower cost.

Exports:

Although the stronger local currency may make foreign products cheaper, it may also make local products more expensive for foreign consumers. This causes a reduction in the competitiveness of local exports in international markets.

Should the domestic currency appreciate or depreciate?

If inflation and interest rates are lower than in a foreign country, it is more likely that the local currency will appreciate, which will help maintain economic stability, keep inflation in check, and make local assets more attractive to foreign investors.

If inflation and interest rates are similar between countries, the exchange rate will remain stable in the long run, i.e., the local currency is overvalued relative to the foreign currency.

Imports: If the IFE is high, it means that the local currency is overvalued relative to the foreign currency. This means that imports will be more expensive for local consumers, reducing the demand for foreign goods. When the IFE is low, it indicates that the local currency is undervalued relative to foreign currencies. This indicates that imports will be more expensive for local consumers, reducing demand for foreign goods.

Exports: A high IFE could make exports less competitive in international markets. Local products would be more expensive for foreign consumers. Conversely, a low IFE may cause exports to be more competitive in international markets, as local products would be cheaper for foreign consumers.

Should the domestic currency appreciate or depreciate?

If inflation and interest rates are similar to those of a foreign country, the local currency should appreciate or depreciate depending on economic and political factors.

Profesor Melchor Enrique Góngora Martínez