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On Policy Interactions Among Nations: When Do Cooperation and Commitment Matter?

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Author Info
Leopold von Thadden (European Central Bank)
Hubert Kempf (Paris School of Economics and Université Paris-1 Panthéon-Sorbonne)

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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 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.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2008.21.

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Date of creation: Mar 2008
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Handle: RePEc:fem:femwpa:2008.21

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Related research
Keywords: Monetary Policy; Fiscal Regimes;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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