We use a 2-country model to analyze fiscal and monetary interactions in a Monetary union.Both countries are integrated and experience spillovers from their partners’ fiscal policies. Wesolve for Monetary Leadership - the Central Bank commits to an inflation target and the fiscalpolicymakers optimize spending - and for Fiscal Leadership - the Central Bank chooses its pre-ferred rate given exogenously defined fiscal policies. High inflation aversion and small outputgaps in one country can generate overspending in their integrated partners. Country weights determined by the Central Bank affect its policy making by overlooking smaller countries
