Tham khảo tài liệu 'fw: monetary and fiscal strategies in the world economy_6', tài chính - ngân hàng, ngân hàng - tín dụng phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 1. The Model 187 Then the first-order condition for a minimum loss gives the reaction function of the American central bank 2M2 A2 - B2 - 2G2 - G1 M1 12 Suppose the European central bank lowers European money supply. Then as a response the American central bank lowers American money supply. The targets of the European government are zero unemployment and a zero structural deficit in Europe. The instrument of the European government is European government purchases. There are two targets but only one instrument so what is needed is a loss function. We assume that the European government has a quadratic loss function LG1 u2 s2 13 LG1 is the loss to the European government caused by unemployment and the structural deficit in Europe. We assume equal weights in the loss function. The specific target of the European government is to minimize its loss given the unemployment function and the structural deficit function. Taking account of equations 1 and 5 the loss function of the European government can be written as follows LG1 A1 - M1 - G1 - 2 G1 - T1 2 14 Then the first-order condition for a minimum loss gives the reaction function of the European government 4G1 2A1 2T1 - 2M1 M2 - G2 15 The targets of the American government are zero unemployment and a zero structural deficit in America. The instrument of the American government is American government purchases. There are two targets but only one instrument so what is needed is a loss function. We assume that the American government has a quadratic loss function 188 Monetary and Fiscal Interaction between Europe and America Case B LG2 u2 s2 16 LG2 is the loss to the American government caused by unemployment and the structural deficit in America. We assume equal weights in the loss function. The specific target of the American government is to minimize its loss given the unemployment function and the structural deficit function. Taking account of equations 2 and 6 the loss function of the American government
