Macro-Economic Adjustment With Import Price Shocks: Real and Monetary Aspects

In this paper we explore in detail the various ways by which the introduction of intermediate imports affects the comparative statics and the dynamics of adjustment in an open economy. The importance of integrating the role of intermediate imports into a theory of macro-economic adjustment derives from the particular set of events that have affected the industrial economies in the 1970's -- the unprecedented rise in raw materials prices, in particular the oil price shock, and the concomitant inflation and widespread unemployment. The analysis lays out in detail the separate workings of the commodity labor and exchange rate markets, under various adjustment mechanisms, with the objective of obtaining empirically quantifiable hypotheses. An empirical study based on the present formulation has been prepared by the authors (see Bruno and Sachs (1979) ) .