ABSTRACT
This chapter seeks to assess the extent to which the four largest European economies, namely France, Italy, the United Kingdom and West Germany, have been influenced by US macro-economic policies and inflation rates over the 1962–85 period. As previously suggested by the importance of exchange rate and balance of payments objectives to the countries analysed in Chapter 6, monetary policy in smaller economies is typically heavily dependent upon external factors. However, even though the domestic inflationary consequences of US budget deficits – and, in particular, the accompanying monetary accommodation of these deficits by the Federal Reserve – have been studied quite extensively, much less attention has been paid to the effects of these policies on other countries. As US policy-makers wrestle with the ‘deficit problem’, the accompanying transmission effects, especially as they apply to Western Europe, are crucially important at a time when the European economy might be the major factor underlying American economic recovery in the 1990s.
