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

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Abstract

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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Authors and Affiliations

  1. LICOS, K.U. Leuven and University of Nijmegen, The Netherlands

    Bas van Aarle

  2. CentER Tilburg University, P.O. 90153, NL 5000LE, Tilburg, The Netherlands

    Jacob Engwerda

  3. University of Antwerp and Tilburg University, The Netherlands

    Joseph Plasmans

Authors
  1. Bas van Aarle
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  2. Jacob Engwerda
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  3. Joseph Plasmans
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van Aarle, B., Engwerda, J. & Plasmans, J. Monetary and Fiscal Policy Interaction in the EMU: A Dynamic Game Approach. Annals of Operations Research 109, 229–264 (2002). https://doi.org/10.1023/A:1016308420460

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  • DOI: https://doi.org/10.1023/A:1016308420460

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