The Mark III International Transmission Model

This paper presents a summary and estimates of the Mark III International Transmission Model, a quarterly macroeconometric model of the United States, United Kingdom, Canada, France, Germany, Italy, Japan, and the Netherlands estimated for 1957 through 1976. The model is formulated to test and measure the empirical importance of alternative channels of international transmission including the effects of capital and trade flows on the money supply, of export shocks on aggregate demand, of currency substitution on money demand, and of variations in the real price of oil. Major Implications of the model estimates are:(1) Countries linked by pegged exchange rates appear to have much more national economic independence than generally supposed. (2) Substantial or complete sterilization of the effects of contemporaneous reserve flows on the money supply is a universal practice of the nonreserve central banks. (3) Quantities such as international trade flows and capital flows are not well explained by observed prices, exchange rates, and interest rates. (4) Explaining real income by innovations inaggregate demand variables works well for U.S. real income but does not transfer easily to other countries. The empirical results suggest a rich menu for further research.