Inflation in a Monetary Union

This book studies the causes and cures of inflation in a monetary union. It carefully discusses the effects of money growth and output growth on inflation. The focus is on producer inflation, currency depreciation and consumer inflation. For instance, what determines the rate of consumer inflation in Europe, and what in America? Moreover, what determines the rate of consumer inflation in Germany, and what in France? Further topics are real depreciation, nominal and real interest rates, the growth of nominal wages, the growth of producer real wages, and the growth of consumer real wages. Here productivity growth and labour growth play significant roles. Another important issue is target inflation and required money growth. A special feature of this book is the numerical estimation of shock and policy multipliers. The present book is part of a larger research project on monetary union, see Carlberg (1999, 2000, 2001). Over the years, in working on this project, I have benefited from comments by lain Begg, Christopher Bliss, Volker Clausen, Peter Flaschel, Wilfried Fuhrmann, Michael Funke, Franz X. Hof, Jay H. Levin, Alfred MauBner, Hans G. Monissen, Manfred J. M. Neumann, Klaus Neusser, Franco Reither, Michael Schmid, Jiirgen von Hagen, and Helmut Wagner. In addition, Michael Brauninger and Alkis Otto carefully discussed with me all parts of the manuscript. Last but not least, Doris Ehrich did the secretarial work as excellently as ever. I would like to thank all of them.

One. The Closed Economy.- 1. The Static Model.- 1.1. Fixed Wages.- 1.2. Flexible Wages.- 2. Given Money Growth.- 2.1. The Dynamic Model.- 2.2. Inflation and Wage Growth.- 2.3. Nominal and Real Interest Rates.- 3. Target Inflation and Required Money Growth.- Two. The World of Two Monetary Regions.- 1. The Static Model.- 1. Fixed Wages.- 2. Flexible Wages.- 2. Given Money Growth.- 1. The Dynamic Model.- 2. Inflation and Depreciation.- 2.1. Producer Inflation.- 2.2. Nominal Depreciation.- 2.3. Real Depreciation.- 2.4. Consumer Inflation.- 3. Wage Growth.- 3.1. Productivity Growth.- 3.2. Labour Growth.- 4. Nominal and Real Interest Rates.- 3. Target Inflation and Required Money Growth.- 1. Required Money Growth.- 1.1. The Dynamic Model.- 1.2. Required Money Growth.- 1.3. Nominal Depreciation.- 1.4. Nominal Interest Rates.- 1.5. Producer Inflation.- 2. Wage Growth.- 2.1. The Dynamic Model.- 2.2. Productivity Growth.- 2.3. Labour Growth.- 4. The Monetary Regions Differ in Size.- Three. The Monetary Union of Two Countries.- 1. The Static Model.- 1. Fixed Wages.- 2. Flexible Wages.- 2. Given Money Growth.- 1. The Dynamic Model.- 2. Inflation and Depreciation.- 2.1. Producer Inflation.- 2.2. Nominal Depreciation.- 2.3. Real Depreciation.- 2.4. Consumer Inflation.- 3. Wage Growth.- 3.1. Productivity Growth.- 3.2. Labour Growth.- 4. Nominal and Real Interest Rates.- 3. Target Inflation and Required Money Growth.- 1. The Dynamic Model.- 2. Required Money Growth.- 3. Wage Growth.- 4. The Union Countries Differ in Size.- Four. A One-Good Model of the World Economy.- 1. The World of Two Monetary Regions.- 1. The Static Model.- 2. The Dynamic Model.- 3. Inflation and Depreciation.- 4. Wage Growth.- 5. Nominal and Real Interest Rates.- 6. Target Inflation and Required Money Growth.- 2. The Monetary Union of Two Countries.- 1. The Static Model.- 2. The Dynamic Model.- 3. Given Money Growth.- 4. Target Inflation and Required Money Growth.- Five. Microfoundations for a Monetary Union.- 1. The World of Two Monetary Regions.- 1. The Approach.- 2. The Demand Functions of European Households.- 3. The Demand Functions of American Households.- 4. The Market for European Goods.- 5. The Market for American Goods.- 6. A First Model of Europe and America.- 7. The Consumption, Export and Import Functions of Europe.- 8. The Consumption, Export and Import Functions of America.- 9. A Second Model of Europe and America.- 2. The Monetary Regions Differ in Size.- 1. The Model.- 2. The Exact Solution.- 3. An Approximate Solution for the Small Monetary Region.- 3. The Large Monetary Union of Two Countries.- 1. The Approach.- 2. The Demand Functions of German Households.- 3. The Demand Functions of French Households.- 4. The Demand Functions of American Households.- 5. The Market for German Goods.- 6. The Market for French Goods.- 7. The Market for American Goods.- 8. A First Model of Germany, France and America.- 9. The Consumption, Export and Import Functions of Germany.- 10. The Consumption, Export and Import Functions of France.- 11. The Consumption, Export and Import Functions of America.- 12. A Second Model of Germany, France and America.- 4. The Small Monetary Union of Two Countries.- Synopsis.- 1. The World of Two Monetary Regions.- 1.1. Given Money Growth.- 1.2. Target Inflation and Required Money Growth.- 2. The Monetary Union of Two Countries.- 2.1. Given Money Growth.- 2.2. Target Inflation and Required Money Growth.- 3. A One-Good Model of the World Economy.- 3.1. The World of Two Monetary Regions.- 3.2. The Monetary Union of Two Countries.- Conclusion.- 1. The World of Two Monetary Regions.- 1.1. Given Money Growth.- 1.2. Target Inflation and Required Money Growth.- 1.3. The Monetary Regions Differ in Size.- 2. The Monetary Union of Two Countries.- 2.1. Given Money Growth.- 2.2. Target Inflation and Required Money Growth.- 2.3. The Union Countries Differ in Size.- 3. A One-Good Model of the World Economy.- 3.1. The World of Two Monetary Regions.- 3.2. The Monetary Union of Two Countries.- 4. Microfoundations for a Monetary Union.- 4.1. The World of Two Monetary Regions.- 4.2. The Monetary Union of Two Countries.- Result.- 1. The World of Two Monetary Regions.- 1.1. Given Money Growth.- 1.2. Target Inflation and Required Money Growth.- 2. The Monetary Union of Two Countries.- 2.1. Given Money Growth.- 2.2. Target Inflation and Required Money Growth.- Symbols.- A Brief Survey of the Literature.- References.