Large Union as a Whole

The world economy consists of two regions:the monetary union and the group of associated countriesthe rest of the world The exchange rate between the union and the associated countries is pegged. The exchange rate between the union and the rest of the world is floating. And the same applies to the exchange rate between the associated countries and the rest of the world. The two regions are the same size and have the same behavioural functions. Likewise, the monetary union and the group of associated countries are the same size and have the same behavioural functions. Index 1 denotes the union, 2 is the group of associated countries, and 3 is the rest of the world. Figure 1 visualizes the approach taken here.