Economic governance in an asymmetric monetary union : a fiscal policy game analysis

Abstract

Given a Monetary Union which is heterogeneous at the level of labour market flexibility, this paper studies the relative effectiveness of two fiscal policy games, i.e. Nash equilibrium and fiscal coordination in terms of macroeconomic stabilization. We will use a static Keynesian model within a closed Monetary Union and prove that the stabilization effectiveness depends mainly on the type and origin of the economic shocks affecting the Union members. Our results also point out that neither of the fiscal configurations succeeds in optimizing the macroeconomic stabilization of both the demand and supply shocks simultaneously for all the Union members.