 Fiscal Policy Coordination and EMU: A Dynamic Game ApproachAndrew Brociner and Paul Levine () No 639, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: This paper considers fiscal policy coordination in a European Economic and Monetary Union (EMU). We use an overlapping generations model which leads to departures from Barro-Ricardian neutrality. In our calibrated model, however, we find these departures to be rather small. Two models are considered: EMU with one good; and a two-good EMU. We find that in the two-good EMU model, as relative prices can change, countries have an incentive to improve their terms of trade. This externality together with increased real interest rates - shared by all EMU countries - leads to an inefficient outcome in the non-cooperative case. Thus fiscal policy coordination can lead to significant welfare gains. With government spending externalities, however, the negative externalities can offset positive ones arising from government spending, such as defence. Furthermore, in the one-good EMU model, cooperation can be counterproductive. We conclude that the case for fiscal policy coordination depends upon the nature of both the economic integration in Europe and the externalities from government spending. Keywords: Barro-Ricardian Neutrality; EMU; Externality; Fiscal Policy Coordination; Reputation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:639 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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