Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union

In this paper we consider a number of key issues related to the policy coordination in a monetary union that has been recently discussed in the literature. To this end we propose a multi-country New-Keynesian model of a monetary union cast in the framework of linear quadratic differential games. Our framework can be used to simulate strategic interactions between an arbitrary number of fiscal authorities interacting in coalitions with or against the common central bank. For many parameter combinations our results confirm the findings of Beetsma et al. (2001) that for symmetric inflation and output gap shocks, fiscal coordination between all the countries is counter-productive within a monetary union. The clash between the central bank and the coalition of national governments is most intense under a symmetric inflation shocks when there is strong conflict concerning the orientation of stabilisation policies. This conflict is less pronounced under an asymmetric inflation and output gap shocks, however, still makes fiscal cooperation unattractive. We extend the existing New-Keynesian literature on policy coordination by considering not only cases of non-coordination, fiscal cooperation and the grand coalition, but also the partial cooperation arrangements between fiscal players. We show that, in many cases, partial fiscal coordination of a subgroup of fiscal players is more efficient, from the social point of view, than non-coordination. However, this regime still delivers poor results from the perspective of individual players. This occurs especially in the case of asymmetric shocks, as the countries directly affected by the shocks tend to "export" losses to the countries with whom they form a coalition. Furthermore, we show that the common objective of the grand coalition is of the upmost importance for the outcome of the stabilisation process.macroeconomic stabilisation, EMU, policy coordination, linear quadratic differential games

Measuring Impact of Uncertainty in a Stylized Macro-Economic Climate Model within a Dynamic Game Perspective

In this paper we try to quantify/measure the main factors that influence the equilibrium outcome and pursued strategies in a simplistic model for the use of fossil versus green energy over time. The model is derived using the standard Solow macro-economic growth model in a two-country setting within a dynamic game perspective. After calibrating the model for a setting of OECD versus non-OECD countries we study what kind of uncertainties affect the outcomes of the linearized model most, assuming both countries use Nash strategies to cope with shocks that impact the model. The main outcome of this study is that the parameters that occur in the objective of both players seem to carry the most uncertainty for both the outcome of the model and strategies

Staying Together or Breaking Apart: Policy-Makers’ Endogenous Coalitions Formation in the European Economic and Monetary Union

In this paper, we analyze coordination of macroeconomic stabilization policies within the EMU by focusing, in a dynamic set-up, on asymmetries, externalities, and the existence of a multi-country context. We study how coalitions among fiscal and monetary authorities are formed and what are their effects on the stabilization of output and price. In particular, our attention is directed to study the consequences on these issues of different institutional contexts in which policy-makers may act. Among other results, we found that, in the presence of externalities, the occurrence of asymmetries is a necessary but not a sufficient condition for cooperation.Macroeconomic stabilization, EMU, coalition formation

Monetary and Fiscal Policy Design under EMU: A Dynamic Game Approach

This paper analyzes the problem of designing macroeconomic stabilization policies within the European Monetary Union (EMU) as a dynamic game between a centralized monetary authority, the European Central Bank (ECB), and national fiscal policy makers. Non-cooperative feedback Nash equilibrium and cooperative Nash bargaining solutions are determined under various assumptions about r ationing regimes in goods and labor markets and structural characteristics of the economies involved.

Macroeconomic Stabilization Policies in the EMU: Spillovers, Asymmetries, and Institutions

This paper studies the institutional design of the coordination of macroeconomic stabilization policies within a monetary union in the framework of linear quadratic differential games. A central role in the analysis plays the partitioned game approach of the endogenous coalition formation literature. The specific policy recommendations in the EMU context depend on the particular characteristics of the shocks and the economic structure. In the case of a common shock, fiscal coordination or full policy coordination is desirable. When asymmetric shocks are considered, fiscal coordination improves the performance but full policy coordination doesn’t produce further gains in policymakers’ welfare.macroeconomic stabilization, EMU, coalition formation, linear quadratic differential games

The (In)finite Horizon Open-loop Nash LQ Game: An Application to the EMU

Abstract In this paper we consider the linear-quadratic differential game with an infinite planning horizon. We derive both necessary and sufficient conditions for existence of open-loop Nash equilibria for this game. Furthermore we show how all equilibria can be easily obtained from the eigenspace structure of a Hamiltonian matrix that is associated with the game

Stabilization of an uncertain simple fishery management game

This note analyzes in a fishery management problem the effects of relaxing one of the usual assumptions in the literature of dynamic games. Specifically, the assumption that players restrict to strategies that stabilize the system. Previous works in the literature have shown that feedback Nash equilibria can exist in which a player can improve unilaterally by choosing a feedback control for which the closed-loop system is unstable. This paper considers in some more detail the implication this setting has in the framework of a simple fishery management. It is shown that if the fishermen are not short-sighted in their valuation of future profits, the considered approach implies a division of them into two groups. One group going for maximal profits and the other group taking care of the imposed stability constraint. To see how noise might impact these results we additionally consider a framework where fishermen take into account the possibility that the fish growth might be corrupted by external factors. We consider a deterministic approach of dealing with noise in this set-up. The model predicts that the more people are involved in the group taking care of the stabilization constraint, the less active they get. Furthermore it predicts that the natural reaction of any of these persons is to increase his activities if he expects more noise. But that this activity is reduced, and partly replaced by more active control policies by group members, if the size of the group increases. Activity of fishermen going for maximal profits is not affected by noise expectations

Robust open-loop Nash equilibria in the noncooperative LQ game revisited

This paper reconsiders existence of worst-case Nash equilibria in noncooperative multi-player differential games, this, within an open-loop information structure. We show that these equilibria can be obtained by determining the open-loop Nash equilibria of an associated differential game with an additional initial state constraint. For the special case of linear-quadratic differential games, we derive both necessary and sufficient conditions for solvability of the finite planning horizon problem. In particular, we demonstrate that, unlike in the standard linear-quadratic differential game setting, uniqueness of equilibria may fail to hold. A both necessary and sufficient condition under which there is a unique equilibrium is provided. A sufficient existence condition for a unique equilibrium is derived in terms of a Riccati differential equation. Consequences for control policies are demonstrated in a simple debt stabilization game