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On policy interactions among nations. When do cooperation and commitment matter?

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Author Info
Hubert Kempf () (Banque de France, Paris School of Economics and Université Paris-1, Panthéon-Sorbonne; Contact address: Banque de France, 39 Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.)
Leopold von Thadden () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

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 su??ciently 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. JEL Classification: E52, E63.

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Paper provided by European Central Bank in its series Working Paper Series with number 880.

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Length: 47 pages
Date of creation: Mar 2008
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Handle: RePEc:ecb:ecbwps:20080880

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Keywords: Monetary policy; Fiscal regimes.;

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  21. Michael B. Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility," NBER Working Papers 7665, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  31. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November. [Downloadable!] (restricted)
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