Rational Policy Expectations

Abstract

1) The output model. This chapter deals with competition between the European central bank, the German government, and the French government. The member countries are the same size and have the same behavioural functions. As a point of departure, take the output 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)

Here Y₁ denotes German output, Y₂ is French output, M is European money supply, G₁ is German government purchases, and G₂ is French government purchases. The endogenous variables are German output and French output.