Models of Endogenous Coalition Formation Between Fiscal and Monetary Authorities in the Presence of a Monetary Union

This paper develops an endogenous coalition formation framework suitable for studying a design of international macroeconomic policy coordination between an arbitrary number of countries and monetary authorities in the presence of (possibly multiple) monetary unions. In analyzing the feasibility of policy cooperation, we follow the approach proposed by the recent literature on the non-cooperative theory of coalition formation, which includes Bloch (1995, 1996), Yi (1997), Ray and Vohra (1997, 1999), Finus (2001) and Finus and Rundshagen (2001, 2003). These models share the common framework of a two-stage structure. In the first stage, coalitions are formed. In the second stage of the game (the stabilization phase), assuming all coalition structures as given, the model is solved by methods of linear quadratic differential games.