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Macroeconomic stabilisation policies in the EMU: Spillovers, asymmetries and institutions

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  • DI BARTOLOMEO, Giovanni
  • ENGWERDA, Jacob
  • PLASMANS, Joseph
  • VAN AARLE, Bas

Abstract

This paper studies the spillover sizes and signs and the institutional design of the co-ordination of macroeconomic stabilisation policies within the European Economic and Monetary Union (EMU). Moreover, in a dynamic setup, the consequences of this institutional design on macroeconomic outcomes and policies are analysed. We distinguish two types of co-ordination: ex-ante - related to the institutional framework; and ex-post concerning the actual policy decisions. The first type is modeled as the result of an endogenous coalition formation process that leads to the formation of policymakers’ coalitions. Ex-post co-ordination implies then the implementation by each coalition of its internally coordinated macroeconomic stabilisation policies in a non-cooperative dynamic game with the other coalitions, and subject to the constraints of the internal dynamics of the EMU economy. The paper shows that the institutional setting of macroeconomic policy co-ordination is of crucial importance in reaching the Pareto-optimal equilibrium of the game, especially when the number and the magnitude of asymmetries increase. The specific recommendations depend on the particular characteristics of the shocks and the economic structure. In the case of a common shock, fiscal co-ordination is counterproductive but full policy co-ordination is desirable. When asymmetric shocks are considered, fiscal co-ordination improves the performance but full policy co-ordination doesn’t produce further gains in policymakers’ welfare. In general, structural asymmetries reduce the gains from co-operation so that in many cases co-operation cannot be supported without introduction of exogenous factors, e.g. a transfer system.

Suggested Citation

  • DI BARTOLOMEO, Giovanni & ENGWERDA, Jacob & PLASMANS, Joseph & VAN AARLE, Bas, 2003. "Macroeconomic stabilisation policies in the EMU: Spillovers, asymmetries and institutions," Working Papers 2003019, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2003019
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    References listed on IDEAS

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    Cited by:

    1. Jean-Sébastien Pentecôte & Marilyne Huchet-Bourdon, 2009. "Shock asymmetries and distance to the Euro Area," Post-Print hal-00730072, HAL.
    2. Chortareas, Georgios & Mavrodimitrakis, Christos, 2017. "Strategic fiscal policies and leadership in a monetary union," European Journal of Political Economy, Elsevier, vol. 47(C), pages 133-147.
    3. repec:gam:jgames:v:9:y:2018:i:1:p:9-:d:132430 is not listed on IDEAS

    More about this item

    Keywords

    Macroeconomic stabilisation; EMU; Coalition formation; Linear quadratic differential games;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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