Abstract

The Direct International Price-Connection Retrospect of a German Discussion

The thesis of the Direct International Price-CGonnection (DIP) says that the transmission of inflation from one country to another is the result of the market mechanism, which effects an equalization of prices on uniform markets. But as a matter of faci, this independent mechanism works perfectly only under a number of unrealistic assumptions. - Another well-known way of inflation transmission is an increasing surplus of the trade balance caused by an inflation abroad. It is shown that an export surplus tends to promote the transmission process, but that it is not at all a necessary condition. The DIP works even in the case of a trade balance deficit. In the normal case, however, increasing prices abroad lead to an export surplus so that both approaches work in the same direction. Exact statements about the validity of both approaches for the transmission process are difficult because it depends highly on several factors (e.g. international economic integration, given market structures) which are different from country to country and variable over time for each country