Competition between European Central Bank, German Government, and French Government

Abstract

1) The static model. As a point of reference, consider the static model. It can be represented by a system of two equations:

$$ Y_1 = A_1 + \alpha {\rm M} + \beta G_1 $$

(1)

$$ Y_2 = A_2 + \alpha {\rm M} + \beta G_2 $$

(2)

Of course this is a reduced form. Y₁ denotes German output, Y₂ is French output, M is European money supply, G₁ is German government purchases, G₂ is French government purchases, A₁ is some other factors bearing on German output, A₂ is some other factors bearing on French output, α is the monetary policy multiplier, and β is the fiscal policy multiplier. The endogenous variables are German output and French output.