1999 | OriginalPaper | Chapter
Small Union of Three Countries
Author : Prof. Dr. Michael Carlberg
Published in: European Monetary Union
Publisher: Physica-Verlag HD
Included in: Professional Book Archive
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The model can be captured by a system of four equations: (1)$$ {{\text{Y}}_{{\text{1}}}} = {\text{ c}}{{\text{Y}}_{{\text{1}}}} + {\text{ }}{{\text{I}}_{{\text{1}}}} + {\text{ }}{{\text{G}}_{{\text{1}}}} + {\text{ he }} - {\text{ q}}{{\text{Y}}_{{\text{1}}}} + {\text{ m}}{{\text{Y}}_{{\text{2}}}} + {\text{ m}}{{\text{Y}}_{{\text{3}}}} $$(2)$$ {{\text{Y}}_{{\text{2}}}} = {\text{ c}}{{\text{Y}}_{{\text{2}}}} + {\text{ }}{{\text{I}}_{{\text{2}}}} + {\text{ }}{{\text{G}}_{{\text{2}}}} + {\text{ he }} + {\text{ m}}{{\text{Y}}_{{\text{1}}}} - {\text{ q}}{{\text{Y}}_{{\text{2}}}} + {\text{ m}}{{\text{Y}}_{{\text{3}}}} $$(3)$$ {{\text{Y}}_{{\text{3}}}} = {\text{ c}}{{\text{Y}}_{{\text{3}}}} + {{\text{I}}_{{\text{3}}}} + {\text{ }}{{\text{G}}_{{\text{3}}}} + {\text{ he }} + {\text{ m}}{{\text{Y}}_{{\text{1}}}} + {\text{ m}}{{\text{Y}}_{{\text{2}}}} - {\text{ q}}{{\text{Y}}_{{\text{3}}}} $$(4)$$ {\text{M }} = {\text{ k}}{{\text{Y}}_{{\text{1}}}} + {\text{k}}{{\text{Y}}_{{\text{2}}}} + {\text{k}}{{\text{Y}}_{{\text{3}}}} $$ 1 stands for union country 1, 2 for union country 2, and 3 for union country 3. Equations (1), (2) and (3) are the goods market equations. Equation (4) is the money market equation. The union countries are the same size and have the same behavioural functions. The parameters of the model are the marginal consumption rate c, the exchange rate sensitivity of exports h, the income sensitivity of money demand k, the marginal import rate relative to another union country m, and the overall marginal import rate q. The exogenous variables are national government purchases Gi? national investment Ii? and union money supply M. The endogenous variables are the union exchange rate e and national income Yi.