DYNAMIC ADJUSTMENT MECHANISM TO A RISE IN PRICE OF RAW MATERIALS: FLEXIBLE EXCHANGE RATE CASE HIROSHI ONO

Recent years have witnessed drastic and persistent rises in oil price under the flexible exchange rate regime. Stress has been put on impacts of rises in the oil price on inflation, unemployment and welfare loss.1 In order to investigate those impacts, it conventionally is assumed that the world consists of two countries: the oil exporters (OPEC) and the Rest. However, when we focus attention on a specific country, for instance, the United States or Japan, and study dynamic adjustment mechanism to a rise in price of raw materials (or petroleum), the two-country model may not be the best choice. After examining responses in the Rest due to a rise in oil price as done by W. M. Cord en (2), we must add a priori assumptions on countries in the Rest. "One can begin with a very simple point. For the Rest as a whole there is really no balance-of-payments problem as a result of the oil price rise.... The balance-of-payments problem, therefore, arises only where one looks at the different impact on different countries within the Rest (W. M. Corden (2, p. 113)).&quot