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

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  • Bas van Aarle
  • Jacob Engwerda
  • Joseph Plasmans
  • Bas Van Aarle

Abstract

The interaction of monetary and fiscal policies is a crucial issue in a highly integrated economic area as the European Union. We argue that EMU, which introduced a common monetary policy and restrictions on fiscal policy at the national level, increases the need for macroeconomic policy cooperation. To study the effects of policy cooperation we compare the effects of three alternative policy regimes in a stylized dynamic model of a monetary union: (i) noncooperative 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 behavior in a dynamic setting into the literature.

Suggested Citation

  • Bas van Aarle & Jacob Engwerda & Joseph Plasmans & Bas Van Aarle, 2001. "Monetary and Fiscal Policy Interaction in the EMU: A Dynamic Game Approach," CESifo Working Paper Series 437, CESifo.
    • Handle: RePEc:ces:ceswps:_437
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    References listed on IDEAS

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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.
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    5. 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.
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    11. 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.
    12. 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.
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    More about this item

    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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