By Michael Carlberg
This booklet stories the dynamics of financial and monetary interactions within the Euro sector. The coverage makers are the ecu crucial financial institution and nationwide governments. the first aim of the ECB is low inflation. And the first aim of a countrywide govt is low unemployment. in spite of the fact that, there's a short-run trade-off among low inflation and coffee unemployment. the following the main target is on sequential coverage judgements. one other concentration is on simultaneous and self reliant coverage judgements. And a 3rd concentration is on coverage cooperation. There are call for shocks, provide shocks, and combined shocks. There are country-specific shocks and customary shocks. the foremost query is: Given a surprise, what are the dynamic features of the ensuing process?
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Extra info for Dynamic Policy Interactions in a Monetary Union
4 Sequential Policy Decisions Another Mixed Shock Unemployment 4 Change in Money Supply 0 Unemployment 4 Change in Govt Purchases 4 Unemployment 0 Inflation 0 Inflation 0 Inflation 4 Inflation 0 Inflation 4 Change in Money Supply − 4 Unemployment 4 Change in Govt Purchases 4 Unemployment 0 and so on 22 2. 1. The Model 1) The static model. The central bank has two targets, that is zero inflation and zero unemployment. By contrast, the government has a single target, that is zero unemployment. The model of unemployment and inflation can be characterized by a system of two equations: u = A−M−G (1) π=B+M+G (2) An increase in money supply lowers unemployment.
Step six refers to the time lag. Unemployment goes from 2 to zero percent. And inflation goes from 2 to 4 percent. Step seven refers to monetary policy. Current unemployment is zero percent, and current inflation is 4 percent. Accordingly, target unemployment and target 27 inflation are 2 percent each. So what is needed is a reduction in money supply of 2 units. Step eight refers to the time lag. Unemployment goes from zero to 2 percent. And inflation goes from 4 to 2 percent. Step nine refers to fiscal policy.
And a cut in money supply requires an increase in government purchases. The Nash equilibrium is determined by the reaction functions of the central bank and the government. From the reaction function of the central bank follows: dM = −1 dG (7) And from the reaction function of the government follows: dG = −1 dM (8) That is to say, the reaction curves do not intersect. As a result there is no Nash equilibrium. 2) The dynamic model. We assume that the government and the central bank decide sequentially.