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Monetary and Fiscal Policy Interaction in the EMU: A Dynamic Game Approach

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  • Bas van Aarle
  • Jacob Engwerda
  • Joseph Plasmans

Abstract

The interaction of monetary and fiscal policies is a crucial issue in a highly integrated economic area as the European Union. We argue that EMU, which introduced a common monetary policy and restrictions on fiscal policy at the national level, increases the need for macroeconomic policy cooperation. To study the effects of policy cooperation we compare the effects of three alternative policy regimes in a stylized dynamic model of a monetary union: (i) noncooperative 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 behavior in a dynamic setting into the literature.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 437.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_437

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  1. Aarle, B. van & Engwerda, J.C. & Plasmans, J.E.J. & Weeren, A.J.T.M., 2001. "Macroeconomic policy interaction under EMU: A dynamic game approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-85061, Tilburg University.
  2. Engwerda, J.C., 1997. "The infinite horizon open-loop Nash LQ-game," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153800, Tilburg University.
  3. Engwerda, J.C. & Aarle, B. van & Plasmans, J.E.J., 2002. "Cooperative and non-cooperative fiscal stabilization policies in the EMU," Open Access publications from Tilburg University urn:nbn:nl:ui:12-88304, Tilburg University.
  4. Nicola Acocella & Giovanni Di Bartolomeo, 2001. "Wage and public expenditure setting in a monetary union," Macroeconomics 0105002, EconWPA.
  5. Laruelle, Annick & Widgren, Mika, 1998. " Is the Allocation of Voting Power among EU States Fair?," Public Choice, Springer, vol. 94(3-4), pages 317-39, March.
  6. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
  7. Laruelle, Annick & Widgren, Mika, 1996. "Is the Allocation of Voting Power among the EU States Fair?," Discussion Papers 556, The Research Institute of the Finnish Economy.
  8. Levinsky, Rene & Silarszky, Peter, 1998. "Voting Power and Coalition Formation: The Case of the Council of the EU," East European Series 56, Institute for Advanced Studies.
  9. 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.
  10. Bindseil, Ulrich & Hantke, Cordula, 1997. "The power distribution in decision making among EU member states," European Journal of Political Economy, Elsevier, vol. 13(1), pages 171-185, February.
  11. Daniel Gros & Carsten Hefeker, 2000. "One Size Must Fit All. National Divergences in a Monetary Union," CESifo Working Paper Series 326, CESifo Group Munich.
  12. Van Aarle B. & Engwerda J.C. & Plasmans J. & Weeren A., 1999. "Macroeconomic policy interaction under EMU : a dynamie game approach," Working Papers 1999020, University of Antwerp, Faculty of Applied Economics.
  13. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 593-612, November.
  14. 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.
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