Competition and the international transmission of inflation

Summary

Exposure to foreign competition is generally recognized to affect a country's export price. In so-called ‘Scandinavian’ models the exposure to foreign competition on domestic markets is introduced as an element in explaining domestic prices. In this paper the authors demonstrate the effects of the introduction of the latter type of exposure into the Mini-Meteor model, which is a comprehensive international economic model with world-wide coverage, rather than the single-country models into which domestic exposure has been introduced so far. The exposure to foreign competition on domestic markets leads to a partial loss for producers in independent pricing policies on these markets. This results in a lower domestic multiplier for domestic inflationary impulses, whereas the multiplier abroad is higher than would otherwise be the case. As compared to the isolated country model as it sits in Mini-Meteor, the comprehensive model will show feedback effects from abroad. The isolated country model will thus underestimate the effects of domestic inflationary impulses if exposure to foreign competition exists on domestic markets. A final conclusion is that the effects of world-wide inflationary impulses will be spread more evenly amongst countries if exposure on domestic markets exists.