Should fiscal policies be centralized in a monetary union? A dynamic game approach

Dmitri Blueschke, Viktoria Blueschke-Nikolaeva () and Reinhard Neck ()
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Viktoria Blueschke-Nikolaeva: University of Klagenfurt

Central European Journal of Operations Research, 2023, vol. 31, issue 4, No 6, 1129-1148

Abstract: Abstract In this paper we analyze dynamic interactions in a monetary union with three fiscal players (the governments of the countries concerned) and a common central bank in the presence of exogenous shocks. The model is calibrated for the euro area and includes a fiscally more solid core block denoted as country 1 as well as a fiscally less solid periphery block represented by countries 2 and 3. Introducing two periphery countries allows us to capture different attitudes of the periphery countries towards the goal of sustainable fiscal performance. Moreover, different coalition scenarios are modelled in this study including a fiscal union, a coalition of periphery countries and a coalition of fiscal-stability oriented countries. The exogenous shocks are calibrated in such a way as to describe the last major crises in the euro area, namely the financial crisis, the European sovereign debt crisis, the Covid-19 crisis, and the Ukraine war (energy price) crisis. Using the OPTGAME algorithm we calculate a cooperative Pareto and non-cooperative feedback Nash equilibrium solutions for the modelled scenarios. The fully cooperative solution yields the best results. The different non-cooperative scenarios allow insights into the underlying trade-off between economic growth, price stability and fiscal stability.

Keywords: Dynamic game; Feedback Nash equilibrium; Pareto solution; Monetary union; Public debt; Coalitions (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10100-023-00846-4

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