By Michael Carlberg
This e-book stories the explanations and remedies of inflation in a financial union. It conscientiously discusses the consequences of cash progress and output progress on inflation. the point of interest is on manufacturer inflation, foreign money depreciation and buyer inflation. for example, what determines the speed of shopper inflation in Europe, and what in the US? furthermore, what determines the speed of customer inflation in Germany, and what in France? additional issues are genuine depreciation, nominal and actual rates of interest, the expansion of nominal wages, the expansion of manufacturer genuine wages, and the expansion of purchaser actual wages. right here productiveness progress and labour progress play major roles. one other vital factor is goal inflation and required cash development. a distinct function of this ebook is the numerical estimation of outrage and coverage multipliers.
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Additional resources for Inflation in a Monetary Union
11 is the interest elasticity of European money demand, with 11 > O. And k is a shift parameter, with k > O. The message of equation (11) is that a 1 percent increase in European income causes a 1 percent increase in European money demand. Similarly, a 1 percent increase in the price of European goods causes a 1 percent increase in European money demand. And a 1 percent increase in the world interest rate causes an 11 percent decrease in European money demand. Equation (12) is the money supply function of Europe.
And equation (17) has it that, in the steady state, the world interest rate is constant. This is a natural assumption as well. Now the static model will be restated in terms of growth rates. In equation (1), all terms except qeP2Y2 / PI grow at the rate YI . As a consequence, qeP2Y2 / PI grows at the rate Yl too. This implies: (18) In equation (2), all terms except qPl Yl / eP2 grow at the rate consequence, qPIYI / eP2 grows at the rate Y2 too. This implies: Y2. As a (19) Of course, equations (18) and (19) are identical.
Strictly speaking, the objective of the central bank is to keep inflation at target level. Then what monetary policy is needed? To illustrate this, take a numerical example. Let target inflation be 1 percent, let productivity growth be 2 percent, and let labour growth be I percent. Then, what rate of money growth is required? Besides, what is the ensuing growth of nominal wages? What is the nominal interest rate, and what is the real interest rate? The model can be characterized by a system of three equations: 24 M: = p+ Y (1) Y=a+N (2) (3) Here P denotes the target rate of inflation.