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Should fiscal policies be centralized in a monetary union? A dynamic game approach

Author

Listed:
  • Dmitri Blueschke

    (University of Klagenfurt)

  • Viktoria Blueschke-Nikolaeva

    (University of Klagenfurt)

  • Reinhard Neck

    (University of Klagenfurt)

Abstract

In this paper we analyze dynamic interactions in a monetary union with three fiscal players (the governments of the countries concerned) and a common central bank in the presence of exogenous shocks. The model is calibrated for the euro area and includes a fiscally more solid core block denoted as country 1 as well as a fiscally less solid periphery block represented by countries 2 and 3. Introducing two periphery countries allows us to capture different attitudes of the periphery countries towards the goal of sustainable fiscal performance. Moreover, different coalition scenarios are modelled in this study including a fiscal union, a coalition of periphery countries and a coalition of fiscal-stability oriented countries. The exogenous shocks are calibrated in such a way as to describe the last major crises in the euro area, namely the financial crisis, the European sovereign debt crisis, the Covid-19 crisis, and the Ukraine war (energy price) crisis. Using the OPTGAME algorithm we calculate a cooperative Pareto and non-cooperative feedback Nash equilibrium solutions for the modelled scenarios. The fully cooperative solution yields the best results. The different non-cooperative scenarios allow insights into the underlying trade-off between economic growth, price stability and fiscal stability.

Suggested Citation

  • Dmitri Blueschke & Viktoria Blueschke-Nikolaeva & Reinhard Neck, 2023. "Should fiscal policies be centralized in a monetary union? A dynamic game approach," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 31(4), pages 1129-1148, December.
  • Handle: RePEc:spr:cejnor:v:31:y:2023:i:4:d:10.1007_s10100-023-00846-4
    DOI: 10.1007/s10100-023-00846-4
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    References listed on IDEAS

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    1. William D. Nordhaus, 1994. "Policy games: Coordination and Independece in Monetary and Fiscal Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 139-216.
    2. Joseph Plasmans & Jacob Engwerda & Bas van Aarle & Giovanni di Bartolomeo & Tomasz Michalak, 2006. "Dynamic Modeling of Monetary and Fiscal Cooperation Among Nations," Dynamic Modeling and Econometrics in Economics and Finance, Springer, number 978-0-387-27931-2, May.
    3. Dmitri Blueschke & Reinhard Neck, 2018. "Game of Thrones: Accommodating Monetary Policies in a Monetary Union," Games, MDPI, vol. 9(1), pages 1-15, February.
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