INTERNATIONAL TRANSMISSION IN EXCHANGE-RATE FLEXIBILITY AND RAW-MATERIAL IMPORTS

In this paper a static two-country model (Europe USA) is discussed which is characterized by exchange rate flexibility, wage indexation and the incorporation of raw materials imports (for example oil). It is assumed that imports of the intermediate good are facturized in the currency of the second country (US-Dollar). The output and price effects of oil price shocks and of monetary and fiscal policies are analyzed. It is shown that oil price increases typically have harder stagflationary effects on Europe than on USA. Negative spillovers of isolated fiscal and monetary policies can be avoided by convoy strategies.