When do cooperation and commitment matter in a monetary union?

This paper offers a framework to study strategic interactions between private players, national fiscal authorities and a common central bank in monetary unions. We establish general conditions, in terms of restrictions on spillover effects of actions by private and public players, under which games...

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Bibliographic Details
Published in:Journal of international economics 2013-11, Vol.91 (2), p.252-262
Main Authors: Kempf, Hubert, von Thadden, Leopold
Format: Article
Language:English
Subjects:
Benchmarks
Central banks
Commitment
Commitments
Cooperation
Economic planning
Economic policy
Economics and Finance
Fiscal regimes
Game theory
Humanities and Social Sciences
Management science
Monetary policy
Monetary unions
Spillovers
Studies
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Summary:This paper offers a framework to study strategic interactions between private players, national fiscal authorities and a common central bank in monetary unions. We establish general conditions, in terms of restrictions on spillover effects of actions by private and public players, under which games that differ in the degree of cooperation and commitment can admit the same equilibrium outcome. We use these conditions to characterize benchmark results on the irrelevance of cooperation and commitment established in recent literature. Moreover, we show for a general setting, in which the benchmark results do not apply, that gains from fiscal cooperation depend on the number of countries and increase as this number gets larger. •We offer a framework to study strategic interactions in monetary unions.•We characterize benchmarks in which cooperation and commitment do not matter.•We analyze general settings in which cooperation and commitment do matter.•We show how in these general settings outcomes depend on the number of players.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2013.07.007