The transmission of correlated shocks under mixed exchange rates

The transmission of correlated economic disturbances is analyzed in a three-country world, where two countries have no macroeconomic impact on a third country but are large enough to influence each other under a system of mixed exchange rates-a system that combines both fixed and flexible exchange rates. Drawing insights from a theoretical three-country model, I present and discuss the consequences for small countries of a variety of correlated shocks under different degrees of indexation. The implications of the results are also indicated