On Policy Interactions among Nations: When Do Cooperation and Commitment Matter?
Paris School of Economics and Université Paris-1 Panthéon-Sorbonne; Direction de la Recherche, Banque de France
Leopold Von Thadden
European Central Bank (ECB)
March 1, 2008
ECB Working Paper No. 880
FEEM Working Paper No. 21.2008
This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, in linear-quadratic models with multiple policymakers commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is sufficiently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations.
Number of Pages in PDF File: 40
Keywords: Monetary Policy, Fiscal Regimes
JEL Classification: E52, E63working papers series
Date posted: April 2, 2008
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