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

Abstract

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 their effects on the stabilization of output and price are. In particular, our attention is directed to studying 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.

Keywords: Macroeconomic Stabilization, EMU, Coalition Formation

JEL Classification: C70, E17, E58, E61, E63