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“Core” and “Periphery” in a Monetary Union: A Macroeconomic Policy Game

Dmitri Blueschke () and Reinhard Neck

International Advances in Economic Research, 2011, vol. 17, issue 3, 334-346

Abstract: We develop a dynamic game model of a two-country monetary union to study strategic interactions between macroeconomic policy makers, namely the central bank and governments. In this union, the governments of participating countries pursue national goals when deciding on fiscal policies, whereas the common central bank’s monetary policy aims at union-wide objective variables. The union considered is asymmetric, consisting of a core, with lower initial public debt, and a periphery, with higher initial public debt. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank using the OPTGAME algorithm. We show that mildly active cooperative countercyclical policies dominate noncooperative solutions and a scenario of no policy intervention. Optimal policies call for a brief expansionary action to bolster the effects on output and a return to a small fiscal primary surplus as soon as the crisis is over until the targeted level of public debt is reached. Copyright International Atlantic Economic Society 2011

Keywords: Monetary union; Asymmetric union; Dynamic game; Numerical solutions; Nash equilibrium; Pareto solution; Fiscal policy; Monetary policy; Policy cooperation (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11294-011-9303-6

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Handle: RePEc:kap:iaecre:v:17:y:2011:i:3:p:334-346:10.1007/s11294-011-9303-6