Monetary and Fiscal Policy in a “Big” Exchange Rate Union a Strategic Analysis

In this chapter the strategic interactions between two countries forming an exchange rate union and the rest of the world are analysed. Each country pursues its targets using policy instruments, the change of which also affects the other countries’ targets. The system of interdependence is derived from the model studied in chapter IV, the introductory section of which is to be referred to for references to the literature on the policy coordination debate. The medium-run results of the model will be used, as the most idenous for the purpose of analysing policy interactions.