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Monetary and fiscal policy interaction in the EMU: A dynamic game approach

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  • Aarle, B. van

    (Tilburg University)

  • Engwerda, J.C.

    (Tilburg University)

  • Plasmans, J.E.J.

    (Tilburg University)

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 Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-91686.

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Date of creation: 2002
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Publication status: Published in Annals of Operations Research (2002) v.109, p.229-264
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-91686

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Web page: http://www.tilburguniversity.edu/

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  1. 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.
  2. 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.
  3. Engwerda, J.C., 1997. "The infinite horizon open-loop Nash LQ-Game," Open Access publications from Tilburg University urn:nbn:nl:ui:12-75346, Tilburg University.
  4. Nicola Acocella & Giovanni Di Bartolomeo, 2003. "Wage and Public Expenditure Setting in a Monetary Union," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 6(1-2), pages 1-16, May - Nov.
  5. Annick Laruelle & Mika Widgrén, 1998. "Is the allocation of voting power among EU states fair?," Public Choice, Springer, vol. 94(3), pages 317-339, March.
  6. Daniel Gros & Carsten Hefeker, 2000. "One Size Must Fit All. National Divergences in a Monetary Union," CESifo Working Paper Series 326, CESifo Group Munich.
  7. 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.
  8. 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.
  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. 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.
  11. 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.
  12. 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.
  13. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
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