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

  • VAN AARLE, Bas
  • ENGWERDA, Jacob
  • PLASMANS, Joseph

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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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 1999020.

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Length: 36 pages
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Handle: RePEc:ant:wpaper:1999020
Contact details of provider: Postal: Prinsstraat 13, B-2000 Antwerpen
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  1. De Grauwe, Paul, 2000. "Monetary Policies In The Presence Of Asymmetries," CEPR Discussion Papers 2393, C.E.P.R. Discussion Papers.
  2. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 10, December.
  3. 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, 08.
  4. Nicola Acocella & Giovanni Di Bartolomeo, 2001. "Wage and public expenditure setting in a monetary union," Working Papers 42, University of Rome La Sapienza, Department of Public Economics.
  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. van Aarle, B. & Engwerda, J.C. & Plasmans, J.E.J. & Weeren, A.J.T.M., 2001. "Macroeconomic policy interaction under EMU : A dynamic game approach," Other publications TiSEM 2ce7e28d-97f5-4b29-b1d2-3, Tilburg University, School of Economics and Management.
  7. 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, 06.
  8. Engwerda, J.C. & van Aarle, B. & Plasmans, J.E.J., 2002. "Cooperative and non-cooperative fiscal stabilization policies in the EMU," Other publications TiSEM 2cc19f3f-16ad-4fed-a701-5, Tilburg University, School of Economics and Management.
  9. Stephen J. Turnovsky & Tamer Basar & Vasco d'Orey, 1987. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," NBER Working Papers 2467, National Bureau of Economic Research, Inc.
  10. 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.
  11. 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.
  12. Bovenberg, A.L. & van Aarle, B. & Raith, M., 1997. "Is there a tragedy of a common Central Bank? A dynamic analysis," Other publications TiSEM e5ccc34e-07da-4d65-baca-b, Tilburg University, School of Economics and Management.
  13. 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.
  14. 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.
  15. 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.
  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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