MACROECONOMIC INTERDEPENDENCE BETWEEN NATIONS IN A WORLD WITHOUT STRUCTURAL ASYMMETRIES

Abstract

This paper presents a multinational model, fairly simple, but including many of the macroeconomic ingredients required to investigate the diffusion of the effects of shocks between nations. It includes three countries, Germany, France and the United States. Germany and France are linked by a fixed exchange rate and share a common central bank. However, they are in a situation of flexible exchange rates with the United States. Interpreting the results of multinational models is complex task. When the different countries share theproperty of structural symmetry, the dynamic multipliers of the model can be decomposed locally into three parts, determined by as many independent sub-models. The first sub-model bears on world aggregated variables. It has the structure of the model of a closed economy. The second sub-model bears on variables measuring the difference between Europe and the United States. It has the structure of the model of a small open economy working under a flexible exchange rate system. The third sub-model bears on variables measuring the difference between Germany and the rest of the world. It has the structure of the model of asmall open economy working under an exogenous exchange rate. This decomposition is used to get a simple economic interpretation of the effects of two unanticipated shocks on the dynamics of the full model.