Fiscal Policy A

Michael Carlberg ()
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Michael Carlberg: Federal University of Hamburg

Chapter 4 in Strategic Policy Interactions in a Monetary Union, 2009, pp 1-5 from Springer

Abstract: An increase in European government purchases lowers unemployment in Europe. On the other hand, it raises inflation there. In the numerical example, a unit increase in government purchases lowers the rate of unemployment by 1 percentage point. On the other hand, it raises the rate of inflation by 1 percentage point. For instance, let initial unemployment be 2 percent, and let initial inflation be 2 percent as well. Now consider a unit increase in government purchases. Then unemployment goes from 2 to 1 percent. On the other hand, inflation goes from 2 to 3 percent. The model of unemployment and inflation can be represented by a system of two equations: (1) $${\rm u = A} - \beta {\rm G}$$ (2) $${\rm \pi = B} - \beta \in {\rm G}$$ Of course this is a reduced form. Here u denotes the rate of unemployment in Europe, π is the rate of inflation in Europe, G is European government purchases, β is the fiscal policy multiplier with respect to unemployment, βε is the fiscal policy multiplier with respect to inflation, A is some other factors bearing on the rate of unemployment in Europe, and B is some other factors bearing on the rate of inflation in Europe. The endogenous variables are the rate of unemployment and the rate of inflation in Europe.

Keywords: Positive Function; Fiscal Policy; Endogenous Variable; Unit Increase; Reduced Form (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_4

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DOI: 10.1007/978-3-540-92751-8_4

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