ABSTRACT
International transmission may affect inflation rates or real variables, such as relative prices, real output, real exchange rates, and real interest rates. Under fixed exchange rates, the impact of international transmission is on inflation rates, real output, and relative prices. Under floating exchange rates, the impact is on all real variables. Interference with the conduct of international commerce and international borrowing and lending is advocated with no calculation of the losses in efficiency such recommendations enforce. An example of a monetary disturbance is the case of a large country on a specie standard, which temporarily issues fiat money to finance a war. In the long run, whether the disturbances are monetary or real, the balance of payments under fixed exchange rates returns to equilibrium. Another kind of monetary shock is exemplified by an increase in Bank rate by the Bank of England to stem a drain of its gold reserves at various times in the 19th century.
