Macroeconomic Policy in a Heterogeneous Monetary Union

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