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Dynamic Perspectives on Managerial Decision Making pp 201–216Cite as

Fiscal and Monetary Policies in a Monetary Union: Conflict or Cooperation?

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Part of the book series: Dynamic Modeling and Econometrics in Economics and Finance ((DMEF,volume 22))

Abstract

In this paper we present an application of the dynamic tracking games framework to a monetary union. We use a small stylized nonlinear two-country macroeconomic model (MUMOD1) of a monetary union to analyse the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm we calculate solutions for two game strategies: a cooperative solution (Pareto optimal) and a non-cooperative equilibrium solution (the Nash game for the feedback information pattern). We show how the policy makers react to demand shocks under non-cooperation and cooperation scenarios. The cooperative solution dominates the non-cooperative solution in all scenarios, which may be interpreted as an argument for coordinating fiscal and monetary policies in a monetary union in a situation of high public debt such as in the recent sovereign debt crisis in Europe.

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Acknowledgements

Thanks are due to an anonymous referee for helpful suggestions for improvement.

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Authors and Affiliations

  1. Department of Economics, Alpen-Adria Universität Klagenfurt, Universitätsstrasse 65-67, A-9020, Klagenfurt, Austria

    Dmitri Blueschke & Reinhard Neck

Authors
  1. Dmitri Blueschke
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  2. Reinhard Neck
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Corresponding author

Correspondence to Reinhard Neck .

Editor information

Editors and Affiliations

  1. Department of Business Administration and Economics and Center for Mathematical Economics, Bielefeld University, Bielefeld, Germany

    Herbert Dawid

  2. Department of Business Administration, University of Vienna, Vienna, Wien, Austria

    Karl F. Doerner

  3. Institute of Statistics and Mathematical Methods in Economics, Vienna University of Technology, Vienna, Wien, Austria

    Gustav Feichtinger

  4. Department of Econometrics and Operations Research & CentER, Tilburg University, Tilburg, The Netherlands

    Peter M. Kort

  5. Department of Business Administration, University of Vienna, Vienna, Wien, Austria

    Andrea Seidl

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Blueschke, D., Neck, R. (2016). Fiscal and Monetary Policies in a Monetary Union: Conflict or Cooperation?. In: Dawid, H., Doerner, K., Feichtinger, G., Kort, P., Seidl, A. (eds) Dynamic Perspectives on Managerial Decision Making. Dynamic Modeling and Econometrics in Economics and Finance, vol 22. Springer, Cham. https://doi.org/10.1007/978-3-319-39120-5_12

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