Description:
This chapter presents some empirical results from studies of macroeconomic interdependence. It focuses on studies that involve linked macroeconometric models of two or more countries. It presents specific versions of the models and analysis with special attention to the role of exchange rates in international transmission. The chapter classifies the main linkage projects, paying special attention to those features of the models that have important bearing on the international transmission of disturbances under fixed and flexible exchange rates. It discusses the international repercussions of fiscal policy, monetary policy, and changes in world oil prices. Empirical studies of macroeconomic interdependence have been producing useful results for over a decade. The earliest studies were mainly of two types: large multilateral projects based mainly on linkage through trade flows and trade prices, and bilateral or few-country models with a more complete and consistent modeling of trade, capital, exchange rate, and, occasionally, migration linkages. Recently, the availability of better multi-country data sets has made possible the construction of many-country models based on consistent aggregate theoretical structures and emphasizing monetary and exchange rate linkages. At the same time, forecasting models such as Project LINK, the OECD INTERLINK, and the EEC Eurolink models have moved some way toward a complete specification of monetary and capital account linkages, and modelers have been examining and ironing out unnecessary differences among the structures of the individual country models.