Rational Policy Expectations

Abstract

1) The output model. This chapter deals with competition between the European central bank, the German labour union, and the French labour union. The member countries are the same size and have the same behavioural functions. As a point of departure, take the output model. It can be represented by a system of two equations:

$$ Y_1 = A_1 + \alpha {\rm M} - \gamma W_1 $$

(1)

$$ Y_2 = A_2 + \alpha {\rm M} - \gamma W_2 $$

(2)

Here Y₁ denotes German output, Y₂ is French output, M is European money supply, W₁ is German nominal wages, and W₂ is French nominal wages. The endogenous variables are German output and French output.