This paper extends the differential game analysis of Engwerda et al (2002)on the interaction between fiscal stabilisation policies in a two-country monetary union. It considers the effect on the behaviour of authorities when there are country and/or union risk premia that depend on the fiscal position of both countries in the monetary union. These effects are discussed in the context of a monetary authority adopting a fixed rate and a Taylor rule, respectively, for its monetary policy. Noncooperative open-loop Nash equilibria and Pareto equilibria are computed numerically for these cases and their adjustment dynamics compared
