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This book studies macroeconomic policies in a monetary union. It carefully discusses the process of policy competition and the structure of policy cooperation. With respect to policy competition, the focus is on competition between the European central bank, the German government, and the French government. With respect to policy cooperation, the focus is on cooperation between the European central bank, the German government, and the French government. Further topics are:

1) Introduction. For ease of exposition we make the following assumptions. The monetary union consists of two countries, say Germany and France. The member countries are the same size and have the same behavioural functions. An increase in European money supply raises both German output and French output, to the same extent respectively. In the numerical example, an increase in European money supply of 100 causes an increase in German output of 100 and an increase in French output of equally 100. All of these assumptions will be relaxed in Parts Two and Three.

1) Introduction. For ease of exposition we assume that the monetary union consists of two countries, say Germany and France. The member countries are the same size and have the same behavioural functions. An increase in German government purchases raises German output. Correspondingly, an increase in French government purchases raises French output. For ease of exposition we assume that fiscal policy in one of the countries has no effect on output in the other country. In the numerical example, an increase in German government purchases of 100 causes an increase in German output of 100. Correspondingly, an increase in French government purchases of 100 causes an increase in French output of 100. All of these assumptions will be relaxed in Parts Two and Three.

1) The static model. As a point of reference, consider the static model. It can be represented by a system of two equations: Of course this is a reduced form. Y denotes German output, Y is French output, M is European money supply, G is German government purchases, G is French government purchases, A is some other factors bearing on German output, A 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.

1) Introduction. As a starting point, take the output model. It can be represented by a system of two equations: Here Y denotes German output, Y is French output, M is European money supply, G is German government purchases, G is French government purchases, α is the monetary policy multiplier, and β is the fiscal policy multiplier. The endogenous variables are German output and French output.

This chapter deals with competition between the European central bank, the German government, and the French government. So far we have assumed that the central bank and the governments decide sequentially. First the central bank decides, then the governments decide. Now we assume that the central bank and the governments decide simultaneously and independently.

This chapter deals with competition between the European central bank, the German government, and the French government. So far we have assumed that the central bank and the governments follow a cold-turkey strategy. Now we assume that the central bank and the governments follow a gradualist strategy. In addition, we assume that the central bank and the governments decide simultaneously and independently.

This chapter is concerned with competition between the European central bank, the German government, and the French government. We assume that the central bank and the governments decide sequentially. First the central bank decides, then the governments decide. In addition, we assume that the central bank and the governments follow a cold-turkey strategy.

1) Introduction. We assume that the countries only differ in size. To be more specific, we assume that the German economy is large and the French economy is small. More precisely, we assume that full-employment output in Germany is large and full-employment output in France is small. As a result, an increase in European money supply raises both German output and French output. Here the increase in German output is large, and the increase in French output is small. In the numerical example, an increase in European money supply of 100 causes an increase in German output of 200 and an increase in French output of 100.

1) Introduction. We assume that the countries only differ in behavioural functions. To be more specific, we assume that the countries differ in monetary policy multipliers. In the numerical example, an increase in European money supply of 100 causes an increase in German output of 200 and an increase in French output of 100.