On policy interactions among nations: when do cooperation and commitment matter ?

This paper offers a comprehensive framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on policy interactions in monetary unions, we prove that games characterized by different commitment and cooperation schemes can have the same equilibrium if certain spillover effects vanish at the common equilibrium of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, models of the linear-quadratic variety with multiple policymakers can generate a `symbiotic' result where commitment and cooperation issues are irrelevant and where the unique equilibrium of any game is the bliss point. The proposed framework is sufficiently general to allow for a broad discussion of policymaking in monetary unions and policy interactions among nations.