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Strategic interactions between monetary and fiscal authorities in a monetary union

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Author Info
Valeria De Bonis (Dipartimento di Scienze Economiche, University of Pisa)
Pompeo Della Posta () (Dipartimento di Scienze economiche, University of Pisa)
Abstract

In this paper we extend Nordhaus’ (1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that: a) co-operation among national fiscal authorities is welfare improving only if they also co-operate with the central bank; b) when this condition is not satisfied, fiscal rules, as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact, may work as co-ordination devices that improve welfare; c) the relationship between several treasuries and a single central bank makes the fiscal leadership solution collapse to the Nash one, so that, contrary to Nordhaus (1994) and Dixit and Luisa Lambertini (2001), when moving from the Nash to the Stackelberg solution, fiscal discipline no longer obtains. Also in this case we thus argue in favour of fiscal rules in a monetary union.

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Publisher Info
Paper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 26.

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Length: 28 pages
Date of creation: Sep 2005
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Handle: RePEc:ave:wpaper:262005

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Related research
Keywords: Fiscal and monetary policy co-ordination; monetary union; international fiscal issues;

Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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