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Macroeconomic Policy in a Heterogeneous Monetary Union

  • Oliver Grimm
  • Stefan Ried

We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union’s and the country-specific welfare.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2007-028.

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Length: 48
Date of creation: May 2007
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Handle: RePEc:hum:wpaper:sfb649dp2007-028
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