Unemployment and Inflation in Economic Crises
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This book studies unemployment and inflation in economic crises, first considering the scenario of a demand shock in Europe. In that case, monetary and fiscal interaction would cause widespread oscillations in European unemployment and European inflation. And what is more, there would be equally far-reaching fluctuations in the European money supply and European government purchases. These monetary and fiscal interactions would have no effects on the American economy. Second, it examines the scenario of a supply shock in Europe, in which monetary and fiscal interactions would have no effects on European unemployment or European inflation; there would also be an explosion of European government purchases and an implosion of the European money supply. Monetary and fiscal interactions would produce uniform oscillations in American unemployment and American inflation. Lastly, we would also see an implosion of both the American money supply and American government purchases.
percent each. So what is needed is no change in American money supply. And so on. For a synopsis see Table 1.13. Now consider the long-run equilibrium. European unemployment is 4 percent, as is European inflation. American unemployment is zero percent, as is American inflation. There is no change in European or American money supply. However, taking the sum over all periods, the reduction in European money supply is 5.33 units, and the reduction in American money supply is 2.67 units. 50 Table
American inflation by 4 percentage points each. And what is more, it lowers European unemployment and raises European inflation by 2 percentage points each. The total increase in European unemployment is zero percentage points. The total increase in European inflation is zero percentage points as well. The total increase in American unemployment is 3 percentage points. And the total decline in American inflation is 3 percentage points. As a consequence, European unemployment stays at 6 percent,
The Model The world economy consists of two monetary regions, say Europe and America. The monetary regions are the same size and have the same behavioural functions. This chapter is based on target system A. The targets of monetary cooperation are zero inflation in Europe and America. An increase in European money supply lowers European unemployment. On the other hand, it raises European inflation. Correspondingly, an increase in American money supply lowers American unemployment. On the other
does inflation in America. For a synopsis see Table 2.3. As a result, given a common mixed shock, monetary cooperation produces zero inflation in each of the regions. However, as a side effect, it causes some unemployment there. There is a cut in money supply. There is a cut in inflation. And there is an increase in unemployment. The initial loss is zero. The common 75 mixed shock causes a loss of 128 units. Then monetary cooperation brings the loss down to zero again. Table 2.3 Monetary
government purchases of 4 units. Step four refers to the time lag. The 4 unit increase in European government purchases lowers European unemployment and raises European inflation by 4 percentage points each. And what is more, it lowers American unemployment and raises American inflation by 2 percentage points each. The 4 unit increase in M. Carlberg, Unemployment and Inflation in Economic Crises, DOI 10.1007/978-3-642-28018-4_9, © Springer-Verlag Berlin Heidelberg 2012 110 American government