changes in a monetary union arise from preference aggregation. Here, structural policy
changes are important and therefore only structural differences across economies are
allowed. This, of course, abstracts from many effects that have been discussed in the
literature, focusing on differences in preferences in the creation of fixed exchange rates and
monetary unions (see e.g. Berger et al. 2001).
2.2. The Situation before Monetary Union
As a benchmark, I begin with the situation before monetary union where countries have
monetary autonomy. Assuming that exchange rates follow purchasing power parity ensures
that exchange rate movements have no influence on output, and that the rate of inflation is
determined by domestic monetary policy only.
The game structure used is Stackelberg where the fiscal authority is the Stackelberg
leader; the solution concept is subgame-perfect equilibrium. The time structure is as
follows: (i) the government decides about the structural reform package si implying a
certain fiscal policy package xi , (ii) having observed this, the private sector forms
expectations about the rate of inflation πie, (iii) the central bank sets the rate of inflation πi ,
and (iv) output is determined. The model is solved by backward induction.
Since the government is Stackelberg leader it takes the reaction of the central bank
into account when making its policy choices. The central bank's best response is
N
πi
πe + (y* - Yi )+ xi
1 + θB
(5)
which, with rational expectations, becomes
(6)
More intriguing information
1. Literary criticism as such can perhaps be called the art of rereading.2. Performance - Complexity Comparison of Receivers for a LTE MIMO–OFDM System
3. The name is absent
4. Learning-by-Exporting? Firm-Level Evidence for UK Manufacturing and Services Sectors
5. The Employment Impact of Differences in Dmand and Production
6. Governance Control Mechanisms in Portuguese Agricultural Credit Cooperatives
7. AN ANALYTICAL METHOD TO CALCULATE THE ERGODIC AND DIFFERENCE MATRICES OF THE DISCOUNTED MARKOV DECISION PROCESSES
8. Ultrametric Distance in Syntax
9. Self-Help Groups and Income Generation in the Informal Settlements of Nairobi
10. The name is absent