Fiscal policy coordination and EMU

Analysis is presented of the case for fiscal policy coordination in a European Economic and Monetary Union (EMU). A 2-bloc model with 2 market structures is examined: EMU producing a single homogeneous good in both blocs (EMU1) and a 2-good EMU (EMU2) where each bloc produces a single "home&quo...

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Bibliographic Details
Published in:Journal of economic dynamics & control 1994-05, Vol.18 (3-4), p.699-729
Main Authors: Levine, Paul, Brociner, Andrew
Format: Article
Language:English
Subjects:
Economic models
Fiscal policy
Game theory
Monetary unions
Studies
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Summary:Analysis is presented of the case for fiscal policy coordination in a European Economic and Monetary Union (EMU). A 2-bloc model with 2 market structures is examined: EMU producing a single homogeneous good in both blocs (EMU1) and a 2-good EMU (EMU2) where each bloc produces a single "home" good. The European Central Bank sets monetary policy so as to achieve credibly low inflation rates. It is found that for EMU2, as relative prices can change, countries have an incentive to improve their terms of trade leading to an inefficient noncooperative outcome which can be avoided by cooperation. A calibrated Yarri-Blanchard-Weil 2-country model is used to examine the case for fiscal policy coordination.
ISSN:0165-1889
1879-1743
DOI:10.1016/0165-1889(94)90028-0