Large Union of Two Countries

The world economy consists of two regions, the monetary union and the rest of the world. The monetary union, in turn, consists of two countries. We assume that the monetary union and the rest of the world are the same size and have the same behavioural functions. Moreover, we assume that the two union countries are the same size and have the same behavioural functions. Subscript 1 denotes union country 1, 2 is union country 2, and 3 is the rest of the world. Figure 1 visualizes the approach taken here.