Strategic interactions between monetary and fiscal authorities in a monetary union

Valeria De Bonis and Pompeo Della Posta ()
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Pompeo Della Posta: Dipartimento di Scienze economiche, University of Pisa

No 26, Working Papers de Economia (Economics Working Papers) from Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro

Abstract: In this paper we extend Nordhaus’ (1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that: a) co-operation among national fiscal authorities is welfare improving only if they also co-operate with the central bank; b) when this condition is not satisfied, fiscal rules, as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact, may work as co-ordination devices that improve welfare; c) the relationship between several treasuries and a single central bank makes the fiscal leadership solution collapse to the Nash one, so that, contrary to Nordhaus (1994) and Dixit and Luisa Lambertini (2001), when moving from the Nash to the Stackelberg solution, fiscal discipline no longer obtains. Also in this case we thus argue in favour of fiscal rules in a monetary union.

Keywords: Fiscal and monetary policy co-ordination; monetary union; international fiscal issues (search for similar items in EconPapers)
JEL-codes: E61 F42 H87 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2005-09
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-pbe
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