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Strategic fiscal policies and leadership in a monetary union

Georgios Chortareas and Christos Mavrodimitrakis ()

European Journal of Political Economy, 2017, vol. 47, issue C, 133-147

Abstract: We consider the strategic interactions between fiscal and monetary policies in a monetary union when a fiscal authority enjoys a strategic advantage. In particular we depart from the standard literature on strategic interactions in monetary unions in that we solve a three-stage game, where the two national fiscal authorities do not play simultaneously. We find that there is always an incentive for the leader fiscal authority to play a three-stage game, which leaves the other fiscal authority worse off under demand shocks. This choice leads to more (less) volatile union-wide fiscal stance for demand (supply) shocks compared to the standard narrow-coordination case. This volatility is positively related to demand shocks' asymmetries.

Keywords: Monetary union; Fiscal policy; Leadership; Strategic advantage; Stabilization policies (search for similar items in EconPapers)
JEL-codes: E62 E63 E65 F45 (search for similar items in EconPapers)
Date: 2017
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