INFLUENCES OF INTERNATIONAL FACTORS ON UNITED-STATES PRICES - A THEORETICAL AND EMPIRICAL-ANALYSIS

Employing an open-economy framework, the present article argues that international forces would have important implications for US price behaviour even prior to the 1970s when the US international sector was relatively small. A distributed-lag price equation that delineates between domestic and foreign impulses is derived. The model is estimated using quarterly data over the 1959-1979 period when international reserves as a measure of world liquidity were subject to relatively little noise. The study finds that growths of US import prices and exports positively affected US price inflation over the entire sample period but not during pre-1971 period. On the other hand, while world liquidity, measured by worldwide international reserves, did not appear to influence US prices for the whole period examined, its effect is found to be positive over the fixed-exchange-rate era. The mean lag of this foreign impulse is estimated at 6 quarters, about 2 quarters larger than that of domestic liquidity as measured by Ml. The findings then suggest inflationary implications of 'world liquidity' for the US during the fixed-exchange-rate period but not under the managed-floating-rate system. © 1991, Taylor & Francis Group, LLC. All rights reserved.