Interaction between Central Bank and Government C

Michael Carlberg ()
Additional contact information
Michael Carlberg: Federal University of Hamburg

Chapter 13 in Strategic Policy Interactions in a Monetary Union, 2009, pp 1-7 from Springer

Abstract: This chapter deals with case B. The targets of the European central bank are zero inflation and zero unemployment. The targets of the European government are zero unemployment and a zero structural deficit. The model of unemployment, inflation, and the structural deficit can be characterized by a system of three equations: (1) $${\rm u} = {\rm A} - {\rm M} - {\rm G}$$ (2) $${\rm \pi } = {\rm B} + {\rm M} + {\rm G}$$ (3) $${\rm s} = {\rm G} - {\rm T}$$ The targets of the European central bank are zero inflation and zero unemployment in Europe. The instrument of the European central bank is European money supply. There are two targets but only one instrument, so what is needed is a loss function. We assume that the European central bank has a quadratic loss function: (4) $${\rm L}_{\rm 1} = {\rm \pi }^{\rm 2} + {\rm u}^{\rm 2}$$ L1 is the loss to the European central bank caused by inflation and unemployment. We assume equal weights in the loss function. The specific target of the European central bank is to minimize the loss, given the inflation function and the unemployment function. Taking account of equations (1) and (2), the loss function of the European central bank can be written as follows: (5) $${\rm L}_{\rm 1} = {\rm (B} + {\rm M} + {\rm G)}^{\rm 2} + {\rm (A} - {\rm M} - {\rm G)}^{\rm 2}$$ Then the first-order condition for a minimum loss gives the reaction function of the European central bank: (6) $$2{\rm M} = {\rm A} - {\rm B} - 2{\rm G}$$ Suppose the European government raises European government purchases. Then, as a response, the European central bank lowers European money supply.

Keywords: Nash Equilibrium; Loss Function; Central Bank; Money Supply; European Central Bank (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-92751-8_13

Ordering information: This item can be ordered from
http://www.springer.com/9783540927518

DOI: 10.1007/978-3-540-92751-8_13

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().