Inflation and Conflicting Claims in the Open Economy

Exchange rates and international prices are fundamental to explaining inflation in open economies. Conflict inflation models account for these variables by including imported inputs and, sometimes, a distribution effect of exchange rates since firms' mark-up cannot be independent of foreign competition in open economies. We analyze the different assumptions on distribution underlying conflict inflation models. We propose an alternative approach building on the Classical–Keynesian theory of distribution for a price-taker open economy. Thus we model conflict inflation in a framework compatible with the Classical–Keynesian approach for the open economy. The model includes tradable prices, considering their direct impact on distribution. Therefore, it addresses a cause of inflation overlooked in the literature. Finally, conflict inflation affects the real exchange rate, which becomes a fundamental distributive variable.