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

Listed author(s):
  • Bas van Aarle
  • Jacob Engwerda

    ()

  • Joseph Plasmans

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. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1016308420460
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Article provided by Springer in its journal Annals of Operations Research.

Volume (Year): 109 (2002)
Issue (Month): 1 (January)
Pages: 229-264

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Handle: RePEc:spr:annopr:v:109:y:2002:i:1:p:229-264:10.1023/a:1016308420460
DOI: 10.1023/A:1016308420460
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  1. van Aarle, Bas & Lans Bovenberg, A. & Raith, Matthias G., 1997. "Is there a tragedy of a common central bank? A dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 417-447.
  2. 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.
  3. 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.
  4. J.C. Engwerda & B. Aarle & J.E.J. Plasmans, 1999. "The (in)finite horizon open‐loop Nash LQ game:An application to EMU," Annals of Operations Research, Springer, vol. 88(0), pages 251-273, January.
  5. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, January.
  6. Laruelle, Annick & Widgren, Mika, 1998. "Is the Allocation of Voting Power among EU States Fair?," Public Choice, Springer, vol. 94(3-4), pages 317-339, March.
  7. 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 115-134, June.
  8. Daniel Gros & Carsten Hefeker, 2002. "One Size Must Fit All: National Divergences in a Monetary Union," German Economic Review, Verein für Socialpolitik, vol. 3(3), pages 247-262, August.
  9. Engwerda, Jacob C. & van Aarle, Bas & Plasmans, Joseph E. J., 2002. "Cooperative and non-cooperative fiscal stabilization policies in the EMU," Journal of Economic Dynamics and Control, Elsevier, vol. 26(3), pages 451-481, March.
  10. 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.
  11. Madeleine o. Hosli, 1996. "Coallitions and Power: Effects of Qualified Majority Voting in the Council of the European Union," Journal of Common Market Studies, Wiley Blackwell, vol. 34(2), pages 255-273, June.
  12. Turnovsky, Stephen J & Basar, Tamer & d'Orey, Vasco, 1988. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," American Economic Review, American Economic Association, vol. 78(3), pages 341-361, June.
  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. Bas Van Aarle & Jacob Engwerda & Joseph Plasmans & Arie Weeren, 2001. "Macroeconomic Policy Interaction under EMU: A Dynamic Game Approach," Open Economies Review, Springer, vol. 12(1), pages 29-60, January.
  15. 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.
  16. 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.
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