Bruno [1] develops a theoretical model of the wage-price adjustment process in an open economy to consider the dynamic impact of changes in import prices and exchange rates. In his model nominal wages are a function of the excess demand for labor, import prices (Pm) and an adaptive expectation term which is measured by a lag of the consumer price index (P C-l). The consumer price index (Pc) is a function of these three variables and the excess de-mand for home goods. Bruno finds that most of the variation of inflation rates for 16 OECD countries for 1972-76 is explained by the initial cost-push effect of the growth of import prices and the expectation of domestic inflation. This conclusion is based upon the empirical results obtained from estimating the pooled 64 cross-section and time series observations of a naive version of his model shown in equation (1).
