Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability

Chortareas, Georgios; Mavrodimitrakis, Christos

doi:10.1016/j.jebo.2021.01.001

Journal of Economic Behavior & Organization

2021

DOI: 10.1016/j.jebo.2021.01.001

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Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability

Georgios Chortareas

Christos Mavrodimitrakis

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2022

2024

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Cited by 6 publications

References 42 publications

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The policy mix in a monetary union: Who bears the burden of asymmetric shocks' stabilisation?

Mavrodimitrakis

2023

Int. J Fin Econ

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We utilise a standard reduced‐form neo‐Keynesian model in a monetary union, in which the monetary authority and the fiscal authorities strategically interact, to explore who, under alternative institutional arrangements (strategic and fiscal regimes) and shocks' configurations, bears the burden of asymmetric shocks' stabilisation. We show that in the core/periphery fiscal regime, described by an asymmetry in the sequence of moves between the core and the peripheral member‐states, asymmetric shocks pass through at the union level to the inflation rate and the output gap when there are strategically significant spill‐over effects and the monetary policy's and fiscal policies' instruments are not perfect substitutes in the stabilisation process. The monetary authority reacts to asymmetric shocks, but does not succeed in fully offsetting them. The first best implies the coordination of fiscal policies. A second best embraces the fiscal leadership strategic regime (as a form of implicit coordination), when there are strong interconnections in the union, or the use of policy instruments by the fiscal authorities that directly decrease inflation when fiscal policy is expansionary, such as taxes, production subsidies or public investment, when there is a strong cost channel of monetary policy.

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The policy mix in a monetary union: Who bears the burden of asymmetric shocks' stabilisation?

Mavrodimitrakis

2023

Int. J Fin Econ

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Debt Stabilisation and Dynamic Interaction Between Monetary Authority and National Fiscal Authorities

Gori,

Purificato,

Sodini

2024

Comput Econ

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The main aim of the present research is to consider a monetary union’s economy consisting of N countries, N fiscal authorities (one for each country) and a single monetary authority. The fiscal authorities want to stabilise output and public debt through the primary government balance, and they can exhibit heterogeneous preferences about the trade-off between output and debt stability. Unlike these, the monetary authority has the aim of price and output stability. They play a non-cooperative policy game, in which they independently and simultaneously choose monetary and fiscal instruments to pursue their goals. In a dynamic setting, each authority must choose its policy instrument prevailing in the next period without knowing—at the end of each period—the choice of other authorities. By assuming static expectations, the present work shows the possibility of several dynamic outcomes. First, there exists one Nash equilibrium representing the optimal level for the macro economy; this equilibrium is stable if the average weight that fiscal authorities assign to output stability is not excessively high; therefore, this result holds even if some authorities are less willing to promote debt stabilisation. Second, in addition to this equilibrium, there exist other Nash equilibria representing steady-state values for macroeconomic variables that differ from the targets adopted by the authorities; these equilibria emerge and are stable if the authorities’ preference for output stability is even greater and with a higher degree of heterogeneity compared to the previous case. Third, the parameters of the model matter to determine the stability properties of the equilibria, and the analysis shows the possibility of nonlinear dynamics.

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Debt stabilisation and dynamic interaction between monetary and fiscal policy: In medio stat virtus

Purificato

Sodini

2023

Communications in Nonlinear Science and Numerical Simulation

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Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability

Cited by 6 publications

References 42 publications

The policy mix in a monetary union: Who bears the burden of asymmetric shocks' stabilisation?

The policy mix in a monetary union: Who bears the burden of asymmetric shocks' stabilisation?

Debt Stabilisation and Dynamic Interaction Between Monetary Authority and National Fiscal Authorities

Debt stabilisation and dynamic interaction between monetary and fiscal policy: In medio stat virtus

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