Monetary and Fiscal Cooperation between Europe and America

Abstract

The model of unemployment, inflation, and the structural deficit can be characterized by a system of six equations:

$$ u_{1} = A_{1}- M_{1} + 0.5M_{2} - G_{1} + 0.5G_{2} $$

(1)

$$ u_{2} = A_{2}- M_{2} + 0.5M_{1} - G_{2} + 0.5G_{1} $$

(2)

$$ \pi_{1} = B_{1} + M_{1} - 0.5M_{2} + G_{1}-0.5G_{2} $$

(3)

$$ \pi_{2} = B_{2} + M_{2} - 0.5M_{1} + G_{2}-0.5G_{1} $$

(4)

$$ s_{1}=G_{1}-T_{1} $$

(5)

$$ s_{2}=G_{2}-T_{2} $$

(6)

The policy makers are the European central bank, the American central bank, the European government, and the American government. The targets of policy cooperation are zero inflation in Europe, zero inflation in America, zero unemployment in Europe, zero unemployment in America, a zero structural deficit in Europe, and a zero structural deficit in America. The instruments of policy cooperation are European money supply, American money supply, European government purchases, and American government purchases. There are six targets but only four instruments, so what is needed is a loss function.