Macroeconomic Policy in a Heterogeneous Monetary Union

CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 07/67

48 Pages Posted: 30 May 2007

See all articles by Oliver R. Grimm

Oliver R. Grimm

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Stefan Ried

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Date Written: May 2007

Abstract

We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union's and the country-specific welfare.

Keywords: monetary union, heterogeneities, policy game, simultaneous policy,sequential policy, coordination, discretionary policies

JEL Classification: E52, E61, F42

Suggested Citation

Grimm, Oliver R. and Ried, Stefan, Macroeconomic Policy in a Heterogeneous Monetary Union (May 2007). CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 07/67, Available at SSRN: https://ssrn.com/abstract=989578 or http://dx.doi.org/10.2139/ssrn.989578

Oliver R. Grimm (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Stefan Ried

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE) ( email )

Spandauer Strasse 1
Berlin, D-10178
Germany

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