Interaction between European Central Bank,German Government, and French Government A

Michael Carlberg ()
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Michael Carlberg: Federal University of Hamburg

Chapter 23 in Strategic Policy Interactions in a Monetary Union, 2009, pp 1-15 from Springer

Abstract: The monetary union consists of two countries, say Germany and France. The member countries are the same size and have the same behavioural functions. An increase in European money supply lowers unemployment in Germany and France. On the other hand, it raises inflation there. However, it has no effect on structural deficits. An increase in German government purchases lowers unemployment in Germany. On the other hand, it raises inflation there. And what is more, it raises the structural deficit. Correspondingly, an increase in French government purchases lowers unemployment in France. On the other hand, it raises inflation there. And what is more, it raises the structural deficit. The primary targets of the European central bank are zero inflation in Germany and France respectively. The primary targets of the German government are zero unemployment and a zero structural deficit in Germany. And the primary targets of the French government are zero unemployment and a zero structural deficit in France. The model of unemployment, inflation, and the structural deficit can be represented by a system of six equations: (1) $${\rm u}_{\rm 1} {\rm = A}_{\rm 1} - {\rm M} - {\rm G}_{\rm 1}$$ (2) $${\rm u}_{\rm 2} {\rm = A}_{\rm 2} - {\rm M} - {\rm G}_{\rm 2}$$ (3) $${\rm \pi }_{\rm 1} {\rm = B}_{\rm 1} + {\rm M} + {\rm G}_{\rm 1}$$ (4) $${\rm \pi }_{\rm 2} {\rm = B}_{\rm 2} + {\rm M} + {\rm G}_{\rm 2}$$ (5) $${\rm s}_{\rm 1} = {\rm G}_1 - {\rm T}_1$$ (6) $${\rm s}_{\rm 2} = {\rm G}_2 - {\rm T}_2$$ Here u1 denotes the rate of unemployment in Germany, u2 is the rate of unemployment in France, π1 is the rate of inflation in Germany, π2 is the rate of inflation in France, s1 is the structural deficit ratio in Germany, s2 is the structural deficit ratio in France, M is European money supply, G1 is German government purchases, G2 is French government purchases, T1 is German tax revenue at full-employment output, T2 is French tax revenue at full-employment output, G1-T1 is the structural deficit in Germany, G2-T2 is the structural deficit in France, A1 is some other factors bearing on the rate of unemployment in Germany, A2 is some other factors bearing on the rate of unemployment in France, B1 is some other factors bearing on the rate of inflation in Germany, and B2 is some other factors bearing on the rate of inflation in France. The endogenous variables are the rates of unemployment, the rates of inflation, and the structural deficit ratios, in Germany and France respectively.

Keywords: Nash Equilibrium; Loss Function; Member Country; European Central Bank; Reaction Function (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-92751-8_23

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DOI: 10.1007/978-3-540-92751-8_23

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