Large Open KMG Economies: Germany within the EMU

Abstract

In this chapter we extend the framework of the preceding chapter towards the inclusion of international trade in commodities.1 We consider a large open economy like Germany in an international environment with fixed exchange rates like Euroland, in order to study two way trade in commodities between ‘Germany’ and the rest of ‘Euroland’, first with German money supply determining the interest rate in ‘Euroland’. Here we also consider pass-through effects of the foreign rate of inflation on the domestic one. In later parts of the chapter we will again consider Taylor type interest rate policy rules and this as well as the earlier scenarios with respect to implications for asymptotic stability, cyclical loss of stability by way of Hopf-bifurcations and more, when the adjustment speeds of the considered economy become sufficiently high.