Macroeconomic policy in a heterogeneous monetary union

Oliver Grimm and 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.

MoreLess

Year of publication:	[2007]
Authors:	Grimm, Oliver ; Ried, Stefan
Publisher:	Zurich : CER-ETH - Center of Economic Research at ETH Zurich
Subject:	monetary union \| heterogeneities \| policy game \| simultaneous policy \| sequential policy \| coordination \| discretionary policies \| Währungsunion \| Monetary union \| Finanzpolitik \| Fiscal policy \| Geldpolitik \| Monetary policy \| Wohlfahrtsanalyse \| Welfare analysis \| Spieltheorie \| Game theory