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Strategic interactions between monetary and fiscal authorities in a monetary union


  • Valeria De Bonis

    (Dipartimento di Scienze Economiche, University of Pisa)

  • Pompeo Della Posta

    () (Dipartimento di Scienze economiche, University of Pisa)


In this paper we extend Nordhaus’ (1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that: a) co-operation among national fiscal authorities is welfare improving only if they also co-operate with the central bank; b) when this condition is not satisfied, fiscal rules, as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact, may work as co-ordination devices that improve welfare; c) the relationship between several treasuries and a single central bank makes the fiscal leadership solution collapse to the Nash one, so that, contrary to Nordhaus (1994) and Dixit and Luisa Lambertini (2001), when moving from the Nash to the Stackelberg solution, fiscal discipline no longer obtains. Also in this case we thus argue in favour of fiscal rules in a monetary union.

Suggested Citation

  • Valeria De Bonis & Pompeo Della Posta, 2005. "Strategic interactions between monetary and fiscal authorities in a monetary union," Working Papers de Economia (Economics Working Papers) 26, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  • Handle: RePEc:ave:wpaper:262005

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    References listed on IDEAS

    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.
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    4. Aizenman, Joshua, 1993. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 819-832, November.
    5. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1998. "Monetary union without fiscal coordination may discipline policymakers," Journal of International Economics, Elsevier, vol. 45(2), pages 239-258, August.
    6. Tamim Bayoumi, 1994. "A Formal Model of Optimum Currency Areas," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 537-554, December.
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    11. Bas Aarle & Lans Bovenberg & Matthias Raith, 1995. "Monetary and fiscal policy interaction and government debt stabilization," Journal of Economics, Springer, vol. 62(2), pages 111-140, June.
    12. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1997. "Central bank independence and public debt policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 873-894, May.
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    More about this item


    Fiscal and monetary policy co-ordination; monetary union; international fiscal issues;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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