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Why macroeconomic coordination may not be possible in a monetary union: A game theoretic approach

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  • Demopoulos, George D.
  • Yannacopoulos, Nicholas A.

Abstract

In order to explore the possibility of macroeconomic policy coordination in monetary unions, we model the monetary union as an n-person cooperative game. A key equilibrium concept of this game is the core, which is defined as the set of outcomes that can be blocked by no coalition. It follows that in a monetary union, coordination is possible if the monetary game possesses a core, i.e., when the joint outcome, obtained if all member countries coordinate their activities, cannot be challenged by anyone. Thus, coordination is possible in all cases, in which the existing economic conditions eliminate all outcomes that any subset of countries could improve upon. And since these economic conditions are summarized by the characteristic function of the game, coordination (or the failure of coordination) of economic policies in a monetary union is determined by its properties.

Suggested Citation

  • Demopoulos, George D. & Yannacopoulos, Nicholas A., 2016. "Why macroeconomic coordination may not be possible in a monetary union: A game theoretic approach," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 69-73.
    • Handle: RePEc:eee:joecas:v:13:y:2016:i:c:p:69-73
    DOI: 10.1016/j.jeca.2016.02.001
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    References listed on IDEAS

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    1. Demopoulos, George D. & Yannacopoulos, Nicholas A., 2001. "On the optimality of a currency area of a given size," Journal of Policy Modeling, Elsevier, vol. 23(1), pages 17-24, January.
    2. Lucas, William F., 1992. "Von Neumann-Morgenstern stable sets," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 17, pages 543-590, Elsevier.
    3. Feldstein, Martin, 2013. "Coordination in the European Union," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 434-439.
    4. Andrew Hughes Hallett & Diana N. Weymark, 2007. "Fiscal leadership and central bank design," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(2), pages 607-627, May.
    5. Eichengreen, Barry, 2012. "Implications of the Euro's crisis for international monetary reform," Journal of Policy Modeling, Elsevier, vol. 34(4), pages 541-548.
    6. Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Presbitero, 2014. "External Imbalances and Fiscal Fragility in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 3-34, February.
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    More about this item

    Keywords

    Currency areas; Game dynamics; Stability conditions;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • E - Macroeconomics and Monetary Economics
    • F - International Economics

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