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Monetary and Fiscal Policy Games and Effects of Institutional Differences between the European Union and the Rest of the World

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  • Pierre Faure

Abstract

The paper deals with monetary and fiscal policy strategic interactions between the European Union and the rest of the world. We use a three-country Mundell-Fleming model to analyze the policy-makers?responses to a negative global productivity shock. The results obtained in a fully non-cooperative setting indicate that the monetary domination equilibrium harms social welfare; the Stackelberg situation in which governments lead is better and can be seen as a second-best form of intra-zone cooperation. The highest welfare gains stem from the joint setting of policies within each continent, that is, from the adjustment of the domestic policy-mix: solving the target conflict between independent national authorities is more important than international cooperation. Another result is that delegating the control of the common monetary policy to a very conservative central banker in Europe deteriorates welfare all over the world.

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Bibliographic Info

Article provided by Presses de Sciences-Po in its journal Revue économique.

Volume (Year): 54 (2003)
Issue (Month): 5 ()
Pages: 937-959

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Handle: RePEc:cai:recosp:reco_545_0937

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  1. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  2. Eichengreen, Barry & Ghironi, Fabio, 1997. "How Will Transatlantic Policy Interactions Change with the Advent of EMU?," CEPR Discussion Papers 1643, C.E.P.R. Discussion Papers.
  3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  4. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Monetary Union without Fiscal Coordination May Discipline Policymakers," DELTA Working Papers, DELTA (Ecole normale supérieure) 95-22, DELTA (Ecole normale supérieure).
  5. Peter B. Kenen, 1993. "EMU, Exchange Rates and the International Monetary System," Discussion Papers (REL - Recherches Economiques de Louvain) 1993022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  6. Agnès Bénassy-Quéré & Benoît Mojon & Jean Pisani-Ferry, 1997. "The Euro and Exchange Rate Stability," Working Papers 1997-12, CEPII research center.
  7. Guy Debelle, 1996. "Central Bank Independence," IMF Working Papers 96/1, International Monetary Fund.
  8. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, December.
  9. Ghironi, Fabio & Giavazzi, Francesco, 1997. "Out in the Sunshine? Outsiders, Insiders, and the United States in 1998," CEPR Discussion Papers 1547, C.E.P.R. Discussion Papers.
  10. D. Begg & F. Giavazzi & Ch. Wyplosz, 1999. "Options for the Future Exchange RatePolicy of the EMU," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
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