THE INTERNATIONAL TRANSMISSION OF ECONOMIC SHOCKS IN A 3-COUNTRY WORLD UNDER MIXED EXCHANGE-RATES

The international transmission of economic disturbances is analyzed in a three-country world where two countries have no macroeconomic impac t on a third country but are large enough to influence each other unde r a system of mixed exchange rates (MER)-a system that combines the fi xed exchange rates (FERs) among two EC member countries (Germany and F rance) and the flexible exchange rates (FLERs) towards a third country , the rest of the world (USA). We find that a positive output demand s hock originating in Germany or France has a positive effect on domesti c output, but, due to a special third country effect, is likely to pro duce a contractionary impact on foreign output (negative transmission) while the total effect on the world economy is expansionary. Money su pply shocks in either Germany or France have identical effects on the output of the two countries. The FLER component of the MER regime serv es as an important tool for dampening the impact of US shocks on the o utput of the EC.