Abstract

The analysis is based upon a Keynesian two-country system including markets for goods, factors and money and, moreover, including the import and export of inputs. It is stated that in many cases a definite answer cannot be given any longer to the question, in what direction the economy of one country is influenced by short-term distrubances abroad under a regime of flexible exchange rates. For example, the effect of a foreign fiscal policy impulse on the home economy is undetermined. In the case of an inflationary monetary policy abroad, the outcome is that - paradoxically - deflationary effects will occur in the home country, whereas the effect on real income and employment is ambiguous. If wage increases create rising prices and decreasing employment in one country, then the other country has to face an import of inflation. Such an import of price increases can be avoided if the economic policy authorities in the respective country adopt properly designed restrictive monetary or fiscal measures which, however, may imply a negative impact on the income and employment level. It has been shown that the results of this analysis can easily be compared with a number of well-known theorems concerning the international transmission of short-run fluctuations in economic activity. This is due to the fact that many of the familiar models - e. g. the Laursenl Metzler approach - are included as sub-systems in the model presented here.