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Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB

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  • Donatella Gatti

Abstract

This paper examines the conditions for fiscal restraint to emerge as Nash equilibrium in the game between fiscal authorities in a monetary union and discusses the implications for the ECB's monetary strategy. We show that fiscal authorities fail to internalize the adverse area-wide effects of their policies when the ECB targets union-wide aggregates. To address this co-ordination failure, we propose that the ECB reacts to fiscal restraint by implementing a monetary reward. Applying the pareto- and risk dominance criteria to the ensuing co-ordination game, we show that the ECB can ensure convergence upon fiscal restraint by adopting a weakly countercyclical reaction function. Copyright 2002, Oxford University Press.

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  • Donatella Gatti, 2002. "Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB," Oxford Economic Papers, Oxford University Press, vol. 54(1), pages 56-71, January.
    • Handle: RePEc:oup:oxecpp:v:54:y:2002:i:1:p:56-71
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    Cited by:

    1. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.
    2. Bruck, Tilman & Zwiener, Rudolf, 2006. "Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 357-369, May.
    3. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Tim Jenkinson & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2009. "Chapter 1: The European Economy: Macroeconomic Outlook and Policy," EEAG Report on the European Economy, CESifo, vol. 0, pages 11-57, February.
    4. Tilman Brück & Andreas Cors & Klaus F. Zimmermann & Rudolf Zwiener, 2002. "Stability Criteria and Convergence: The Role of the System of National Accounts for Fiscal Policy in Europe," Discussion Papers of DIW Berlin 318, DIW Berlin, German Institute for Economic Research.
    5. Georgios Chortareas & Christos Mavrodimitrakis, 2011. "Fiscal Policies and Monetary Leadership in a Monetary Union with a Deficit-Concerned Central Bank," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 3(1), pages 1-24, March.
    6. Blandine ZIMMER, 2005. "Coordination des négociations salariales en UEM : un rôle majeur pour la BCE," Working Papers of BETA 2005-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. Christopher Allsopp, 2002. "The Future of Macroeconomic Policy in the European Union," Discussion Papers 07, Monetary Policy Committee Unit, Bank of England.

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