Small Union of Two Countries
In this section we make the following assumptions. The monetary union is a small open economy with perfect capital mobility. For the small union, the world interest rate is given exogenously r* = const. Under perfect capital mobility, the union interest rate corresponds to the world interest rate r = r*. Thus the union interest rate is constant, too. The exchange rate between the union and the rest of the world is flexible.
KeywordsFiscal Policy Real Exchange Rate Money Demand Monetary Expansion Money Wage
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