INTERNATIONAL TRANSMISSION IN EXCHANGE-RA TE FLEXIBILITY AND RAW-MATERIAL IMPORTS

In this paper a static two-country model (Europe USA) is discussed whi ch is characterized by exchange rate flexibility, wage indexation and the incorporation of raw materials imports (for example oil). It is as sumed that imports of the intermediate good are facturized in the curr ency of the second country (US-Dollar). The output and price effects o f oil price shocks and of monetary and fiscal policies are analyzed. I t is shown that oil price increases typically have harder stagflationa ry effects on Europe than on USA. Negative spillovers of isolated fisc al and monetary policies can be avoided by convoy strategies.