Macroeconomic policy in a heterogeneous Monetary Union

Oliver Grimm and Stefan Ried

No 2007-028, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

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

Keywords: monetary union; heterogeneities; policy game; simultaneous policy; sequential policy; coordination; discretionary policies (search for similar items in EconPapers)
JEL-codes: E52 E61 F42 (search for similar items in EconPapers)
Date: 2007
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Working Paper: Macroeconomic Policy in a Heterogeneous Monetary Union (2007)
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