Monetary and Fiscal Competition

Abstract

1) The static model. This chapter deals with competition between the European central bank, the German government, the French government, and the Italian government. As a point of reference, consider the static model. It can be represented by a system of three equations:

$$ Y_1 = A_1 + \alpha {\rm M} + \beta G_1 $$

(1)

$$ Y_2 = A_2 + \alpha {\rm M} + \beta G_2 $$

(2)

$$ Y_3 = A_3 + \alpha {\rm M} + \beta G_3 $$

(3)

Y₁ denotes German output, Y₂ is French output, Y₃ is Italian output, M is European money supply, G₁ is German government purchases, G₂ is French government purchases, G₃ is Italian government purchases, α is the monetary policy multiplier, and β is the fiscal policy multiplier. The endogenous variables are German output, French output, and Italian output.