Let us begin with a small country in a large monetary union, say Belgium (section 1). The country in question is a small open economy with perfect capital mobility. For the small country, the foreign interest rate is given exogenously. Under perfect capital mobility, the domestic interest rate agrees with the foreign interest rate. As a consequence, the domestic interest rate is constant, too. Domestic output is determined by the demand for domestic goods. There is a single money market for the union as a whole. There is no separate money market for the small country.
KeywordsMonetary Policy Fiscal Policy Union Credit Monetary Union Money Demand
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