In a paper, I saw Dasgupta, 2019 control for the exchange rate change. Normally, I control for inflation.

From my view, these two variables seem to play the same role, leading to a multicollinearity issue? So, if we control for inlfation, whether we still need to control for exchange rate


1 Answer 1


Controlled inflation is exercised mainly over the prices of goods and not over their supply and demand. Since World War II, this type of inflation has been one of the most widespread. Governments and monetary authorities for social and political reasons are exercising discreet control to avoid the catastrophic consequences of galloping inflation. In normal periods, however, the use of this measure for a long time is of dubious effectiveness.

Controlled (managed floating exchange rate) - determined by the Central Bank in relation to the balance of payments situation, cash, etc.

There are a number of warning signs that if we check it is possible to realize that there is multilinearity, most important is table of correlation coefficients (Correlation Matrix) of the independent variables.


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