Inflation in a Monetary Union by Michael Carlberg
By Michael Carlberg
This booklet reviews the motives and therapies of inflation in a financial union. It conscientiously discusses the consequences of cash development and output progress on inflation. the point of interest is on manufacturer inflation, foreign money depreciation and buyer inflation. for example, what determines the speed of client inflation in Europe, and what in the US? furthermore, what determines the speed of customer inflation in Germany, and what in France? extra issues are genuine depreciation, nominal and actual rates of interest, the expansion of nominal wages, the expansion of manufacturer actual wages, and the expansion of patron actual wages. the following productiveness development and labour development play major roles. one other very important factor is goal inflation and required funds progress. a unique function of this ebook is the numerical estimation of outrage and coverage multipliers.
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Additional info for Inflation in a Monetary Union
European goods and American goods are imperfect substitutes for each other. European output is determined by the demand for European goods. American output is determined by the demand for American goods. European money demand equals European money supply. And American money demand equals American money supply. There is perfect capital mobility between Europe and America, so the European interest rate equals the American interest rate. The monetary regions are the same size and have the same behavioural functions.
The message of equation (2) is that a 1 percent increase in the world interest rate causes an E percent decrease in European investment. Equation (3) is the export function of Europe. It states that European exports are an increasing function of American income. X I stands for European exports to America, as measured in European goods. PI is the price of European goods, as measured in euros. P2 is the price of American goods, as measured in dollars. e is the exchange rate between the dollar and the euro.
YI is European income, as measured in European goods. And q is the marginal import rate of Europe, with q > O. European output is determined by the demand for European goods YI = C I + II + XI - QI' Taking account of the behavioural functions (1) until (4), we arrive at the goods market equation of Europe: (5) 3) The market for American goods. The behavioural functions are as follows: 31 C 2 = cY2 (6) 12 = b 2 r- e (7) X2 =qP1Y1 / eP2 Q2 =qY2 (8) (9) Equation (6) is the consumption function of America.