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VIEWS: 11 PAGES: 7

									M. Carlberg                An Economic Analysis of Monetary Union



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1. The Small Union as a Whole

1.1. Fixed Money Wages



    1) Monetary policy. An increase in union money supply causes a
depreciation of the euro. This in turn raises union exports and union output. In
the numerical example, a 1 percent increase in union money supply causes a 4.5
percent depreciation of the euro and a 1 percent increase in union output.

    2) Fiscal policy. An increase in union government purchases causes an
appreciation of the euro. This in turn lowers union exports. The net effect is that
union output does not change. In the numerical example, a 1 percent increase in
union government purchases (relative to union output) causes a 12.5 percent
appreciation of the euro.

    3) Wage shocks. An increase in union money wages causes an increase in the
price of union goods and an appreciation of the euro. This in turn lowers union
exports and union output. In the numerical example, a 1 percent increase in union
money wages causes a 1 percent increase in the price of union goods, a 3.5
percent appreciation of the euro, and a 1 percent decrease in union output.

    4) Productivity shocks. An increase in union productivity causes a decrease
in the price of union goods and a depreciation of the euro. This in turn raises
union exports and union output. The net effect is that union labour demand does
not change. In the numerical example, a 1 percent increase in union productivity
causes a 1 percent decrease in the price of union goods, a 3.5 percent
depreciation of the euro, and a 1 percent increase in union output.
2

1.2. Flexible Money Wages



    1) Monetary policy. An increase in union money supply causes a
depreciation of the euro. This in turn drives up union money wages and the price
of union goods. In the numerical example, a 1 percent increase in union money
supply causes a 1 percent depreciation of the euro, a 1 percent increase in union
money wages, and a 1 percent increase in the price of union goods.

    2) Fiscal policy. An increase in union government purchases causes an
appreciation of the euro. The net effect is that union money wages and the price
of union goods do not change. In the numerical example, a 1 percent increase in
union government purchases (relative to union output) causes a 12.5 percent
appreciation of the euro.

    3) Labour supply shocks. An increase in union labour supply causes a
decrease in union money wages, a decrease in the price of union goods, and a
depreciation of the euro. This in turn raises union output. In the numerical
example, a 1 percent increase in union labour supply causes a 1 percent decrease
in union money wages, a 1 percent decrease in the price of union goods, a 3.5
percent depreciation of the euro, and a 1 percent increase in union output.

    4) Productivity shocks. An increase in union productivity causes a decrease
in the price of union goods and a depreciation of the euro. This in turn raises
union output. The net effect is that union money wages do not change. In the
numerical example, a 1 percent increase in union productivity causes a 1 percent
decrease in the price of union goods, a 3.5 percent depreciation of the euro, and a
1 percent increase in union output.
                                                                               3

2. The Small Union of Two Countries

2.1. Fixed Money Wages



    1) Monetary policy. Consider a small union of two identical countries, say
Germany and France. An increase in union money supply causes a depreciation
of the euro. This in turn raises both German exports and French exports. As a
consequence, German output and French output move up. In the numerical
example, a 1 percent increase in union money supply causes a 4.5 percent
depreciation of the euro, a 1 percent increase in German output, and a 1 percent
increase in French output.

    2) Fiscal policy. An increase in German government purchases causes an
appreciation of the euro. This in turn lowers both German exports and French
exports. The net effect is that German output moves up. On the other hand,
French output moves down. In the numerical example, a 1 percent increase in
German government purchases (relative to German output) causes a 6.25 percent
appreciation of the euro, an 0.74 percent increase in German output, and an 0.74
percent decrease in French output.

    3) Wage shocks. An increase in German money wages causes an increase in
the price of German goods and an appreciation of the euro. This in turn brings
down German output. As a secondary effect, French output comes down as well.
In the numerical example, a 1 percent increase in German money wages causes a
1 percent increase in the price of German goods, a 1.75 percent appreciation of
the euro, an 0.79 percent decrease in German output, and an 0.21 percent
decrease in French output.

    4) Productivity shocks. An increase in German productivity causes a
decrease in the price of German goods and a depreciation of the euro. This in
turn raises German output. As a secondary effect, French output moves up too.
On balance, German labour demand falls whereas French labour demand rises. In
the numerical example, a 1 percent increase in German productivity causes a 1
percent decrease in the price of German goods, a 1.75 percent depreciation of the
euro, an 0.79 percent increase in German output, and an 0.21 percent increase in
4

French output. Further it causes an 0.21 percent decrease in German labour
demand and an 0.21 percent increase in French labour demand.




2.2. Flexible Money Wages



    1) Monetary policy. An increase in union money supply causes a
depreciation of the euro. This in turn raises both German and French money
wages. As a consequence, the prices of German and French goods move up. In
the numerical example, a 1 percent increase in union money supply causes a 1
percent depreciation of the euro, a 1 percent increase in German money wages, a
1 percent increase in French money wages, a 1 percent increase in the price of
German goods, and a 1 percent increase in the price of French goods.

     2) Fiscal policy. An increase in German government purchases causes an
appreciation of the euro. The net effect is that German money wages and the
price of German goods move up. On the other hand, French money wages and
the price of French goods move down. In the numerical example, a 1 percent
increase in German government purchases (relative to German output) causes a
6.25 percent appreciation of the euro, a 1.25 percent increase in German money
wages, a 1.25 percent decrease in French money wages, a 1.25 percent increase
in the price of German goods, and a 1.25 percent decrease in the price of French
goods.

    3) Labour supply shocks. An increase in German labour supply lowers
German money wages and the price of German goods. This in turn raises
German output. As a secondary effect, French money wages and the price of
French goods move up. In the numerical example, a 1 percent increase in
German labour supply causes a 1.35 percent decrease in German money wages, a
1.35 percent decrease in the price of German goods, and a 1 percent increase in
German output. In addition, it causes an 0.35 percent increase in French money
wages and an 0.35 percent increase in the price of French goods.
                                                                                  5

    4) Productivity shocks. An increase in German productivity lowers German
money wages and the price of German goods. This in turn raises German output.
As a secondary effect, French money wages and the price of French goods move
up. In the numerical example, a 1 percent increase in German productivity causes
an 0.35 percent decrease in German money wages, a 1.35 percent decrease in the
price of German goods, and a 1 percent increase in German output. Moreover, it
causes an 0.35 percent increase in French money wages and an 0.35 percent
increase in the price of French goods.




3. The World of Two Regions

3.1. Fixed Money Wages



    1) Monetary policy. Consider a world of two identical regions, say Europe
and America. An increase in European money supply causes a depreciation of the
euro, an appreciation of the dollar, and a decrease in the world interest rate. The
depreciation of the euro, in turn, raises European exports. The appreciation of the
dollar, however, lowers American exports. And the decrease in the world interest
rate raises both European investment and American investment. The net effect is
that European output moves up. On the other hand, American output moves
down. In the numerical example, a 1 percent increase in European money supply
causes a 2.75 percent depreciation of the euro, a 2.75 percent appreciation of the
dollar, an 0.75 percent increase in European output, and an 0.25 percent decrease
in American output.

    2) Fiscal policy. An increase in European government purchases causes an
appreciation of the euro, a depreciation of the dollar, and an increase in the world
interest rate. The appreciation of the euro, in turn, lowers European exports. The
depreciation of the dollar raises American exports. And the increase in the world
interest rate lowers both European investment and American investment. The net
effect is that European output and American output move up, at the same rate
respectively. In the numerical example, a 1 percent increase in European
6

government purchases (relative to European output) causes a 6.25 percent
appreciation of the euro, a 6.25 percent depreciation of the dollar, an 0.89 percent
increase in European output, and an 0.89 percent increase in American output.

    3) Wage shocks. An increase in European money wages pushes up the price
of European goods. This in turn causes an appreciation of the euro, a depreciation
of the dollar, and an increase in the world interest rate. The net effect is that
European output moves down. On the other hand, American output moves up. In
the numerical example, a 1 percent increase in European money wages causes a 1
percent increase in the price of European goods, a 1.75 percent appreciation of
the euro, a 1.75 percent depreciation of the dollar, an 0.75 percent decrease in
European output, and an 0.25 percent increase in American output.

     4) Productivity shocks. An increase in European productivity reduces the
price of European goods. This in turn causes a depreciation of the euro, an
appreciation of the dollar, and a decrease in the world interest rate. The net effect
is that European output moves up. On the other hand, American output moves
down. On balance, both European labour demand and American labour demand
decline. In the numerical example, a 1 percent increase in European productivity
causes a 1 percent decrease in the price of European goods, a 1.75 percent
depreciation of the euro, a 1.75 percent appreciation of the dollar, an 0.75 percent
increase in European output, and an 0.25 percent decrease in American output.
Besides, it causes an 0.25 percent decrease in European labour demand and an
0.25 percent decrease in American labour demand.




3.2. Flexible Money Wages



    1) Monetary policy. An increase in European money supply causes a
depreciation of the euro. This in turn raises European money wages and the price
of European goods. On the other hand, American money wages and the price of
American goods do not change. In the numerical example, a 1 percent increase in
European money supply causes a 1 percent depreciation of the euro, a 1 percent
                                                                                  7

increase in European money wages, and a 1 percent increase in the price of
European goods.

     2) Fiscal policy. An increase in European government purchases causes an
appreciation of the euro, a depreciation of the dollar, and an increase in the world
interest rate. The net effect is that both European and American money wages
move up. As a consequence, the prices of European and American goods move
up too. In the numerical example, a 1 percent increase in European government
purchases (relative to European output) causes a 6.25 percent appreciation of the
euro, a 6.25 percent depreciation of the dollar, a 1.79 percent increase in
European money wages, a 1.79 percent increase in American money wages, a
1.79 percent increase in the price of European goods, and a 1.79 percent increase
in the price of American goods.

    3) Labour supply shocks. An increase in European labour supply lowers
European money wages and the price of European goods. This in turn raises
European output. As a secondary effect, American money wages and the price of
American goods come down too. In the numerical example, a 1 percent increase
in European labour supply causes a 1.5 percent decrease in European money
wages, a 1.5 percent decrease in the price of European goods, and a 1 percent
increase in European output. Moreover, it causes an 0.5 percent decrease in
American money wages and an 0.5 percent decrease in the price of American
goods.

    4) Productivity shocks. An increase in European productivity lowers
European money wages and the price of European goods. This in turn raises
European output. As a secondary effect, American money wages and the price of
American goods come down too. In the numerical example, a 1 percent increase
in European productivity causes an 0.5 percent decrease in European money
wages, a 1.5 percent decrease in the price of European goods, and a 1 percent
increase in European output. Further, it causes an 0.5 percent decrease in
American money wages and an 0.5 percent decrease in the price of American
goods.

								
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