The study analyzes the wage and price adjustment process in open economies in response to changes in exchange rates and import price. It distinguishes between the impact or cost-push effect, in which the system may exhibit temporary nonneutrality, and the lagged response of excess demand in labor and home-goods markets, which determines the stability of neutrality of long-run equilibria. An empirical illustration is given of the importance of the cost-push effect in explaining differential price behavior of OECD countries during 1972-76.

The study analyzes the wage and price adjustment process in open economies in response to changes in exchange rates and import price. It distinguishes between the impact or cost-push effect, in which the system may exhibit temporary nonneutrality, and the lagged response of excess demand in labor and home-goods markets, which determines the stability of neutrality of long-run equilibria. An empirical illustration is given of the importance of the cost-push effect in explaining differential price behavior of OECD countries during 1972-76.