Fiscal Policy in Germany B

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

Chapter 18 in Strategic Policy Interactions in a Monetary Union, 2009, pp 1-5 from Springer

Abstract: The model of unemployment and inflation can be characterized by a system of two equations: (1) $${\rm u}_1 = {\rm A}_1 - {\rm G}_1$$ (2) $${\rm \pi }_1 = {\rm B}_1 + {\rm G}_1$$ The targets of the German government are zero unemployment and zero inflation in Germany. The instrument of the German government is German government purchases. There are two targets but only one instrument, so what is needed is a loss function. We assume that the German government has a quadratic loss function: (3) $${\rm L}_1 = {\rm \pi }_{_1 }^2 - {\rm u}_{_1 }^2$$ L1 is the loss to the German government caused by inflation and unemployment. We assume equal weights in the loss function. The specific target of the German government 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 German government can be written as follows: (4) $${\rm L}_1 = ({\rm B}_{\rm 1} + {\rm G}_1 )^2 - ({\rm A}_{\rm 1} - {\rm G}_1 )^2$$ Then the first-order condition for a minimum loss is: (5) $${\rm 2G}_{\rm 1} {\rm = A}_{\rm 1} - {\rm B}_{\rm 1}$$ Here G1 is the optimum level of German government purchases. An increase in A1 requires an increase in German government purchases. And an increase in B1 requires a cut in German government purchases. From equations (1) and (5) follows the optimum rate of unemployment in Germany: (6) $${\rm 2u}_{\rm 1} {\rm = A}_{\rm 1} + {\rm B}_{\rm 1}$$ And from equations (2) and (5) follows the optimum rate of inflation in Germany: (7) $${\rm 2\pi }_{\rm 1} {\rm = A}_{\rm 1} + {\rm B}_{\rm 1}$$ Unemployment in Germany is not zero, nor is inflation there.

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_18

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

DOI: 10.1007/978-3-540-92751-8_18

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 ().