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Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB

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  • Donatella Gatti

Abstract

This paper examines the conditions for fiscal restraint to emerge as Nash equilibrium in the game between fiscal authorities in a monetary union and discusses the implications for the ECB's monetary strategy. We show that fiscal authorities fail to internalize the adverse area-wide effects of their policies when the ECB targets union-wide aggregates. To address this co-ordination failure, we propose that the ECB reacts to fiscal restraint by implementing a monetary reward. Applying the pareto- and risk dominance criteria to the ensuing co-ordination game, we show that the ECB can ensure convergence upon fiscal restraint by adopting a weakly countercyclical reaction function. Copyright 2002, Oxford University Press.

Suggested Citation

  • Donatella Gatti, 2002. "Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB," Oxford Economic Papers, Oxford University Press, vol. 54(1), pages 56-71, January.
  • Handle: RePEc:oup:oxecpp:v:54:y:2002:i:1:p:56-71
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    Cited by:

    1. Bruck, Tilman & Zwiener, Rudolf, 2006. "Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 357-369, May.
    2. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Tim Jenkinson & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2009. "Chapter 1: The European Economy: Macroeconomic Outlook and Policy," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 11-57, February.
    3. Tilman Brück & Andreas Cors & Klaus F. Zimmermann & Rudolf Zwiener, 2002. "Stability Criteria and Convergence: The Role of the System of National Accounts for Fiscal Policy in Europe," Discussion Papers of DIW Berlin 318, DIW Berlin, German Institute for Economic Research.
    4. Georgios Chortareas & Christos Mavrodimitrakis, 2011. "Fiscal Policies and Monetary Leadership in a Monetary Union with a Deficit-Concerned Central Bank," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 3(1), pages 1-24, March.
    5. Foresti, Pasquale, 2017. "Monetary and fiscal policies in interaction in monetary unions," LSE Research Online Documents on Economics 69623, London School of Economics and Political Science, LSE Library.
    6. Christopher Allsopp, 2002. "The Future of Macroeconomic Policy in the European Union," Discussion Papers 07, Monetary Policy Committee Unit, Bank of England.
    7. Blandine ZIMMER, 2005. "Coordination des négociations salariales en UEM : un rôle majeur pour la BCE," Working Papers of BETA 2005-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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