Why Macroeconomic coordination may not be possible in a Monetary Union?

George D. Demopoulos and Nicholas A. Yannacopoulos
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George D. Demopoulos: Athens University of Economics and Business
Nicholas A. Yannacopoulos: Athens University of Economics and Business

No 201411, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: Macroeconomic policy coordination in a monetary union seems to work, when it is in the self-interest of the individual countries to do (individual rationality) what is also good for the currency area as a whole (group rationality). We explore the possibility of co- ordination, first in the context of the conventional theory using a two country model opera- ting in decentralized framework. We find that coordination of macroeconomic policies fails, because of the revealed preference of the creditor countries to hoard their surpluses. We then explore the same problem in a cooperative framework, modeling the monetary union as an n-person cooperative game. This game does not possess a core and therefore any agreement by the set of all concerned countries to coordinate macroeconomic policies can be challenged by any subcoalition. Failure to coordinate macroeconomic policies in a monetary union means that the process of adjustment is asymmetric rather than symmetric (the cost of adjustment is enti- rely born by the debtor countries), a fact that renders its survival problematic.

Keywords: Currency areas; dynamics of economic integration; stability equilibrium conditions. (search for similar items in EconPapers)
JEL-codes: C62 E32 F15 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-11
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