This book studies the coexistence of inflation and unemployment in a monetary union. The focus is on how to reduce the associated loss. The primary target of the European central bank is low inflation in Europe. The primary target of the German government is low unemployment in Germany. And the primary target of the French government is low unemployment in France. The European central bank has a quadratic loss function. The same applies to the German government and the French government. The key questions are: To what extent can the sequential process of monetary and fiscal decisions reduce the loss caused by inflation and unemployment? Is monetary and fiscal cooperation superior to the sequential process of monetary and fiscal decisions?

CONTENTS:
Introduction ..................................................................................................... 1
1. Subject and Approach ...................................................................................... 1
2. The Monetary Union as a Whole..................................................................... 2
3. The Monetary Union of Two Countries .......................................................... 3
3.1. Monetary Policy in Europe ................................................................... 3
3.2. Fiscal Policies in Germany and France................................................. 4
3.3. Central Bank and Governments Decide Sequentially........................... 5
3.4. Central Bank and Governments Cooperate........................................... 6
3.5. Central Bank and Governments Differ in Loss Function ..................... 7
Part One. The Rate of Inflation.............................................................. 9
Chapter 1. Monetary Policy in Europe ............................................................ 11
1. The Model...................................................................................................... 11
2. Some Numerical Examples............................................................................ 14
Chapter 2. Fiscal Policies in Germany and France......................................... 19
1. The Model......................................................................................................19
2. A Numerical Example.................................................................................... 22
Chapter 3. Central Bank and Governments Decide Sequentially ................. 25
1. The Dynamic Model ......................................................................................25
2. Some Numerical Examples............................................................................ 28
Chapter 4. Central Bank and Governments Cooperate ................................. 32
1. The Model......................................................................................................32
2. Some Numerical Examples............................................................................ 34
Chapter 5. The Countries Differ in Size........................................................... 37
Chapter 6. The Countries Differ in Behaviour................................................ 41
Chapter 7. The Monetary Union of Three Countries ..................................... 45
Part Two. The Rate of Unemployment .............................................. 49
1. The Model...................................................................................................... 51
2. Some Numerical Examples............................................................................ 54
Chapter 2. Fiscal Policies in Germany and France......................................... 59
1. The Model......................................................................................................59
2. A Numerical Example.................................................................................... 62
Chapter 3. Central Bank and Governments Decide Sequentially ................. 65
1. The Dynamic Model ......................................................................................65
2. Some Numerical Examples............................................................................ 68
Chapter 4. Central Bank and Governments Cooperate ................................. 72
1. The Model......................................................................................................72
2. Some Numerical Examples............................................................................ 74
Chapter 5. The Countries Differ in Size........................................................... 77
Chapter 6. The Countries Differ in Behaviour................................................ 81
Chapter 7. The Monetary Union of Three Countries ..................................... 85
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Chapter 1. Monetary Policy in Europe ............................................................ 51
Contents
The Monetary Union as a Whole ............................... 89
Chapter 1. The Model........................................................................................ 91
1.
2. The Loss Function of the European Central Bank......................................... 92
3. Policy Model A .............................................................................................. 93
4. Policy Model B .............................................................................................. 94
5. Policy Model C .............................................................................................. 95
6. Policy Model D .............................................................................................. 96
Chapter 2. Some Numerical Examples ............................................................98
1. Weight of Inflation in Loss Function is 0.5 ................................................... 98
2. Weight of Inflation in Loss Function is 0.75 ............................................... 104
3. Weight of Inflation in Loss Function is 1 .................................................... 106
Chapter 3. Monetary Policy in the Phillips Curve Diagram........................ 109
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Part Three. Inflation and Unemployment:
The Model of Inflation and Unemployment .................................................. 91
The Monetary Union of Two Countries.................. 113
Chapter 1. Monetary Policy in Europe ..........................................................115
1. The Model of Inflation and Unemployment ................................................ 115
2. The Loss Function of the European Central Bank....................................... 117
3. The Policy Model......................................................................................... 118
4. Another Version of the Policy Model.......................................................... 120
5. Some Numerical Examples.......................................................................... 121
Chapter 2. Fiscal Policies in Germany and France .....................................127
1. The Model of Inflation and Unemployment ................................................ 127
2. The Loss Functions of National Governments ............................................ 129
3. The Policy Model......................................................................................... 130
4. Another Version of the Policy Model.......................................................... 132
5. Some Numerical Examples.......................................................................... 133
Chapter 3. Central Bank and Governments Decide Sequentially...............137
1. The Dynamic Model ....................................................................................137
2. Some Numerical Examples.......................................................................... 141
Chapter 4. Central Bank and Governments Cooperate............................... 151
1. The Model of Inflation and Unemployment ................................................ 151
2. The Loss Function........................................................................................152
3. The Policy Model......................................................................................... 153
4. Another Version of the Policy Model.......................................................... 155
5. Some Numerical Examples.......................................................................... 157
Chapter 5. Central Bank and Governments Differ in Loss Function......... 166
1. The Dynamic Model ....................................................................................166
2. Some Numerical Examples.......................................................................... 168
XIV Contents
Part Four. Inflation and Unemployment:
Appendix: Some Basic Models ............................................................ 175
1. Monetary Policy in Europe .......................................................................... 175
2. Fiscal Policies in Germany and France........................................................ 180
3.
4. Central Bank and Governments Cooperate ................................................. 190
Conclusion..................................................................................................... 197
1. The Monetary Union as a Whole................................................................. 197
2. The Monetary Union of Two Countries ...................................................... 200
2.1. Monetary Policy in Europe ................................................................. 200
2.2. Fiscal Policies in Germany and France............................................... 203
2.3. Central Bank and Governments Decide Sequentially......................... 204
2.4. Central Bank and Governments Cooperate......................................... 209
2.5. Central Bank and Governments Differ in Loss Function ................... 213
Result............................................................................................................... 217
1. Monetary Policy in Europe .......................................................................... 217
2. Fiscal Policies in Germany and France........................................................ 218
3. Central Bank and Governments Decide Sequentially.................................. 219
4. Central Bank and Governments Cooperate ................................................ 221
Symbols .......................................................................................................... 223
The Current Research Project ............................................................ 225
References ..................................................................................................... 229
Index ............................................................................................................... 241
Contents
Central Bank and Governments Decide Sequentially.................................. 183
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