Introduction

This book studies the coexistence of inflation and unemployment in a monetary union. The focus is on how to reduce the loss caused by inflation and unemployment. The targets of the European central bank are zero inflation and zero unemployment in Europe. A reduction in European money supply lowers inflation in Europe. On the other hand, it raises unemployment there. We assume that the European central bank has a quadratic loss function. The European central bank changes European money supply so as to reduce the loss caused by inflation and unemployment in Europe.