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Monetary and fiscal policy interactions in the EMU when cyclical conditions are uncertain

Content Provider	Springer Nature Link
Author	Buti, Marco Larch, Martin Balboni, Fabio
Copyright Year	2008
Abstract	This paper examines economic policy interactions in the Economic and Monetary Union when the assessment of cyclical conditions in real time is surrounded by uncertainty. On the basis of a simple stylised model it shows that with a Nash-type of interaction different views about the output gap on the side of the policy players—the Council of the European Union, the European Commission and the European Central Bank—can give rise to excessive activism with policy players pushing economic variables into opposite directions. It argues that the costs of such policy conflicts can be reduced by agreeing on a common assessment of the cycle, by constraining policy variables, and/or by increasing the weight of fiscally conservative institutions. An alternative option to sidestep policy conflicts ensuing from diverging views of the cycle is to take policy decisions sequentially, as is the case in a Stackelberg-type of interaction. The paper shows that for a given misperception of the cycle, the impact on the policy instruments and on output and inflation are generally smaller in the Stackelberg equilibrium as compared to a Nash outcome. Alternative allocations of roles—that is leader versus follower—are discussed and assessed.
Starting Page	21
Ending Page	44
Page Count	24
File Format	PDF
ISSN	03408744
Journal	Empirica
Volume Number	36
Issue Number	1
e-ISSN	15736911
Language	English
Publisher	Springer US
Publisher Date	2008-11-26
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Monetary policy Fiscal policy Economic and Monetary Union Real-time output gap estimates Public Finance & Economics Industrial Organization Econometrics Macroeconomics/Monetary Economics International Economics European Integration
Content Type	Text
Resource Type	Article
Subject	Geography, Planning and Development Development Economics and Econometrics

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