Monetary policy strategies in the world economy carlberg_6

2. Some Numerical Examples 155 A second solution is an increase in European money supply of 2 units, an increase in American money supply of 1 unit, a reduction in European government purchases of 2 units, and an increase in American government purchases of 1 unit. As a result, given a supply shock in Europe, monetary and fiscal cooperation is ineffective. The initial loss is zero. The supply shock in Europe causes a loss of 18 units. Then policy cooperation keeps the loss at 18 units. 3) A mixed shock in Europe. In each of the regions, let initial unemployment be zero, and let initial inflation be zero as well. Step one refers to the mixed shock in Europe. In terms of the model there is an increase in B of 6 units. Step two refers to the outside lag. Inflation in Europe goes from zero to 6 percent. Inflation in America stays at zero percent. Unemployment in Europe stays at zero percent, as does unemployment in America. Step three refers to the policy response. According to the model, a first solution is a reduction in European money supply of 4 units, a reduction in American money supply of 2 units, no change in European government purchases, and no change in American government purchases. Step four refers to the outside lag. Inflation in Europe goes from 6 to 3 percent. Inflation in America stays at zero percent. Unemployment in Europe goes from zero to 3 percent. And unemployment in America stays at zero percent. For a synopsis see Table 6.3. A second solution is no change in European money supply, no change in American money supply, a reduction in European government purchases of 4 units, and an increase in American government purchases of 2 units. A third solution is a reduction in European money supply of 2 units, a reduction in American money supply of 1 unit, a reduction in European government purchases of 2 units, and an increase in American government purchases of 1 unit. First consider the effects on Europe. As a result, given a mixed shock in Europe, monetary and fiscal cooperation lowers inflation in Europe. On the other hand, it raises unemployment there. Second consider the effects on America. As a result, monetary and fiscal cooperation produces zero inflation and zero unemployment in America. The initial loss is zero. The mixed shock in Europe 156 Monetary and Fiscal Cooperation between Europe and America causes a loss of 36 units. Then policy cooperation brings the loss down to 18 units. Table 6.3 Monetary and Fiscal Cooperation between Europe and America A Mixed Shock in Europe Europe America Unemployment 0 Inflation 0 Shock in A1 0 Shock in B1 6 Unemployment 0 Inflation 6 Change in Money Supply − 4 Change in Govt Purchases 0 Unemployment 3 Inflation 3 Unemployment 0 Inflation 0 Unemployment 0 Inflation 0 Change in Money Supply − 2 Change in Govt Purchases 0 Unemployment 0 Inflation 0 4) Another mixed shock in Europe. In each of the regions, let initial unemployment be zero, and let initial inflation be zero as well. Step one refers to the mixed shock in Europe. In terms of the model there is an increase in A1 of 6 units. Step two refers to the outside lag. Unemployment in Europe goes from zero to 6 percent. Unemployment in America stays at zero percent. Inflation in Europe stays at zero percent, as does inflation in America. Step three refers to the policy response. According to the model, a first solution is an increase in European money supply of 4 units, an increase in American money supply of 2 units, no change in European government purchases, and no change in American government purchases. Step four refers 2. Some Numerical Examples 157 to the outside lag. Unemployment in Europe goes from 6 to 3 percent. Unemployment in America stays at zero percent. Inflation in Europe goes from zero to 3 percent. And inflation in America stays at zero percent. For an overview see Table 6.4. Table 6.4 Monetary and Fiscal Cooperation between Europe and America Another Mixed Shock in Europe Europe America Unemployment 0 Inflation 0 Shock in A1 6 Shock in B1 0 Unemployment 6 Inflation 0 Change in Money Supply 4 Change in Govt Purchases 0 Unemployment 3 Inflation 3 Unemployment 0 Inflation 0 Unemployment 0 Inflation 0 Change in Money Supply 2 Change in Govt Purchases 0 Unemployment 0 Inflation 0 A second solution is no change in European money supply, no change in American money supply, an increase in European government purchases of 4 units, and a reduction in American government purchases of 2 units. A third solution is an increase in European money supply of 2 units, an increase in American money supply of 1 unit, an increase in European government purchases of 2 units, and a reduction in American government purchases of 1 unit. 158 Monetary and Fiscal Cooperation between Europe and America First consider the effects on Europe. As a result, given another mixed shock in Europe, monetary and fiscal cooperation lowers unemployment in Europe. On the other hand, it raises inflation there. Second consider the effects on America. As a result, monetary and fiscal cooperation produces zero inflation and zero unemployment in America. The initial loss is zero. The mixed shock in Europe causes a loss of 36 units. Then policy cooperation brings the loss down to 18 units. 5) A common demand shock. In each of the regions, let initial unemployment be zero, and let initial inflation be zero as well. Step one refers to a decline in the demand for European and American goods. In terms of the model there is an increase in A1 of 3 units, a decline in B1 of 3 units, an increase in A2 of 3 units, and a decline in B2 of 3 units. Step two refers to the outside lag. Unemployment in Europe goes from zero to 3 percent, as does unemployment in America. Inflation in Europe goes from zero to – 3 percent, as does inflation in America. Step three refers to the policy response. According to the model, a first solution is an increase in European money supply of 6 units, an increase in American money supply of 6 units, no change in European government purchases, and no change in American government purchases. Step four refers to the outside lag. Unemployment in Europe goes from 3 to zero percent, as does unemployment in America. Inflation in Europe goes from – 3 to zero percent, as does inflation in America. Table 6.5 presents a synopsis. A second solution is no change in European money supply, no change in American money supply, an increase in European government purchases of 2 units, and an increase in American government purchases of 2 units. A third solution is an increase in European money supply of 3 units, an increase in American money supply of 3 units, an increase in European government purchases of 1 unit, and an increase in American government purchases of 1 unit. As a result, given a common demand shock, monetary and fiscal cooperation produces zero inflation and zero unemployment in each of the regions. The initial loss is zero. The common demand shock causes a loss of 36 units. Then policy cooperation brings the loss down to zero again. 2. Some Numerical Examples 159 Table 6.5 Monetary and Fiscal Cooperation between Europe and America A Common Demand Shock Europe America Unemployment 0 Inflation 0 Shock in A1 3 Shock in B1 − 3 Unemployment 3 Inflation − 3 Change in Money Supply 6 Change in Govt Purchases 0 Unemployment 0 Inflation 0 Unemployment 0 Inflation 0 Shock in A2 3 Shock in B2 − 3 Unemployment 3 Inflation − 3 Change in Money Supply 6 Change in Govt Purchases 0 Unemployment 0 Inflation 0 6) A common supply shock. In each of the regions, let initial unemployment be zero, and let initial inflation be zero as well. Step one refers to the common supply shock. In terms of the model there is an increase in B1 of 3 units, as there is in A1. And there is an increase in B2 of 3 units, as there is in A2 . Step two refers to the outside lag. Inflation in Europe goes from zero to 3 percent, as does inflation in America. Unemployment in Europe goes from zero to 3 percent, as does unemployment in America. Step three refers to the policy response. According to the model, a first solution is no change in European money supply, no change in American money supply, no change in European government purchases, and no change in American government purchases. Step four refers to the outside lag. Inflation in Europe stays at 3 percent, as does inflation in America. Unemployment in Europe stays at 3 percent, as does unemployment in America. Table 6.6 gives an overview. ... - tailieumienphi.vn