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Macroeconomic policy interaction under EMU : a dynamie game approach

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  • Van Aarle B.
  • Engwerda J.C.
  • Plasmans J.
  • Weeren A.

Abstract

The interaction of monetary and fiscal policies is a crucial issue in a highly integrated economic area as the European Union. We investigate to which extent the EMU, that introduced a common monetary policy and restrictions on fiscal policy at the national level, benefits from macroeconomic policy cooperation due to the various interactions, spillovers and externalities from national macroeconomic policies. To study the effects of policy cooperation we compare the impact of three alternative policy regimes in a stylized dynamic model of the EMU: (i) non-cooperative monetary and fiscal policies, (ii) partial cooperation, and (iii) full cooperation both in symmetric and asymmetric settings where countries differ in structural characteristics, policy preferences and/or bargaining power. The paper introduces an analysis of coalitional behaviour in a dynamic setting into the literature.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 1999020.

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Length: 36 pages
Date of creation: Jul 1999
Date of revision:
Handle: RePEc:ant:wpaper:1999020

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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References

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  1. Agell, Jonas, 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Working Paper Series 1998:17, Uppsala University, Department of Economics.
  2. M. Buti & D. Franco & H. Ongena, 1997. "Budgetary Policies during Recessions - Retrospective Application of the "Stability and Growth Pact" to the Post-War Period," European Economy - Economic Papers 121, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Demertzis, Maria & Hughes Hallett, Andrew, 1999. "An Independent Central Bank Faced With Elected Governments," CEPR Discussion Papers 2219, C.E.P.R. Discussion Papers.
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  7. Lensberg, Terje, 1988. "Stability and the Nash solution," Journal of Economic Theory, Elsevier, vol. 45(2), pages 330-341, August.
  8. Reinhard Neck & Engelbert Dockner, 1995. "Commitment and coordination in a dynamic game model of international economic policy-making," Open Economies Review, Springer, vol. 6(1), pages 5-28, January.
  9. Engwerda, J.C. & Salmah, Y., 2010. "Feedback Nash Equilibria for Linear Quadratic Descriptor Differential Games," Discussion Paper 2010-79, Tilburg University, Center for Economic Research.
  10. Weeren, A.J.T.M. & Schumacher, J.M. & Engwerda, J.C., 1994. "Asymptotic analysis of Nash equilibria in nonzero-sum linear-quadratic differential games: The two player case," Research Memorandum 634, Tilburg University, Faculty of Economics and Business Administration.
  11. Currie, David & Levine, Paul L & Pearlman, Joseph, 1990. "European Monetary Union or Hard EMS?," CEPR Discussion Papers 472, C.E.P.R. Discussion Papers.
  12. Barrell, Ray & Sefton, James, 1997. "Fiscal Policy and the Masstricht Solvency Criteria," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(3), pages 259-79, June.
  13. Engwerda, J.C., 2000. "Feedback Nash equilibria in the scalar infinite horizon LQ-Game," Open Access publications from Tilburg University urn:nbn:nl:ui:12-81029, Tilburg University.
  14. Hughes Hallett, A J & Ma, Yue, 1996. "Changing Partners: The Importance of Coordinating Fiscal and Monetary Policies within a Monetary Union," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(2), pages 115-34, June.
  15. German, Israel, 1985. "Disequilibrium Dynamics and the Stability of Quasi Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 571-96, August.
  16. Hughes Hallett, A J & Vines, D, 1993. "On the Possible Costs of European Monetary Union," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(1), pages 35-64, March.
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  18. Petit, Maria Luisa, 1989. "Fiscal and Monetary Policy Co-ordination: A Differential Game Approac h," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 161-79, April-Jun.
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Cited by:
  1. Fritz Breuss & Andrea Weber, 1999. "Economic Policy Coordination in the EMU: Implications for the Stability Pact," EUI-RSCAS Working Papers 26, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  2. Aarle, B. van & Engwerda, J.C. & Plasmans, J.E.J., 2001. "Monetary and Fiscal Policy Interaction in the EMU: A Dynamic Game Approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-88307, Tilburg University.
  3. Plasmans, J.E.J., 2001. "The Effects of Fiscal and Monetary Policy in an Open Economy: A Case of EU, the USA and Japan," Open Access publications from Tilburg University urn:nbn:nl:ui:12-92275, Tilburg University.
  4. Plasmans J. & Meersman H. & Van Poeck A. & Merlevede B., 1999. "Generosity of the unemployment benefit systern and wage flexibility in EMU, time varying evidence in five countries," Working Papers 1999043, University of Antwerp, Faculty of Applied Economics.
  5. Creel, Jérôme & Sterdyniak, Henri, 2002. "The fiscal theory of the price level and sluggish inflation : how important shall the wealth effect be ?," Economics Papers from University Paris Dauphine 123456789/3304, Paris Dauphine University.
  6. Aarle, B. van & Bartolomeo, G. di & Engwerda, J.C. & Plasmans, J.E.J., 2001. "Monetary and fiscal policy design in the EMU using a dynamic game approach: An overview," Open Access publications from Tilburg University 2001.19, Tilburg University.
  7. Bas van Aarle & Giovanni Di Bartolomeo & Jacob Engwerda & Joseph Plasmans, 2002. "Monetary and Fiscal Policy Design in the EMU: An Overview," Open Economies Review, Springer, vol. 13(4), pages 321-340, October.
  8. F. Bohn, 2003. "Monetary Union and the Interest-Exchange Rate Trade-off," Economics Discussion Papers 554, University of Essex, Department of Economics.
  9. Oliver Grimm & Stefan Ried, 2007. "Macroeconomic Policy in a Heterogeneous Monetary Union," CER-ETH Economics working paper series 07/67, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  10. Creel, Jerome & Capoen, Fabrice & Cussy, Pascal & Lenoble-Liaud, Helene, 2003. "How to manage financial shocks: Intra-European vs. international monetary coordination," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 431-455, December.
  11. Herzog, Bodo, 2006. "Coordination of fiscal and monetary policy in CIS-countries: A theory of optimum fiscal area?," Research in International Business and Finance, Elsevier, vol. 20(2), pages 256-274, June.
  12. repec:spo:wpecon:info:hdl:2441/2972 is not listed on IDEAS

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