Macroeconomic stabilisation policies in the EMU: Spillovers, asymmetries and institutions

Giovanni Di Bartolomeo (giovanni.dibartolomeo@uniroma1.it), Jacob Engwerda, Joseph Plasmans (joseph.plasmans@uantwerpen.be) and Bas van Aarle

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: This paper studies the spillover sizes and signs and the institutional design of the co-ordination of macroeconomic stabilisation policies within the European Economic and Monetary Union (EMU). Moreover, in a dynamic setup, the consequences of this institutional design on macroeconomic outcomes and policies are analysed. We distinguish two types of co-ordination: ex-ante - related to the institutional framework; and ex-post concerning the actual policy decisions. The first type is modeled as the result of an endogenous coalition formation process that leads to the formation of policymakers’ coalitions. Ex-post co-ordination implies then the implementation by each coalition of its internally coordinated macroeconomic stabilisation policies in a non-cooperative dynamic game with the other coalitions, and subject to the constraints of the internal dynamics of the EMU economy. The paper shows that the institutional setting of macroeconomic policy co-ordination is of crucial importance in reaching the Pareto-optimal equilibrium of the game, especially when the number and the magnitude of asymmetries increase. The specific recommendations depend on the particular characteristics of the shocks and the economic structure. In the case of a common shock, fiscal co-ordination is counterproductive but full policy co-ordination is desirable. When asymmetric shocks are considered, fiscal co-ordination improves the performance but full policy co-ordination doesn’t produce further gains in policymakers’ welfare. In general, structural asymmetries reduce the gains from co-operation so that in many cases co-operation cannot be supported without introduction of exogenous factors, e.g. a transfer system.

Keywords: Macroeconomic stabilisation; EMU; Coalition formation; Linear quadratic differential games (search for similar items in EconPapers)
JEL-codes: C70 E17 E58 E61 E63 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-06
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Journal Article: MACROECONOMIC STABILIZATION POLICIES IN THE EMU: SPILLOVERS, ASYMMETRIES AND INSTITUTIONS (2006)
Working Paper: Macroeconomic Stabilization Policies in the EMU: Spillovers, Asymmetries, and Institutions (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2003019

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