Strategic fiscal policies and leadership in a monetary union

Chortareas, G. and Mavrodimitrakis, C. ORCID: https://orcid.org/0000-0002-7436-9164 (2017) Strategic fiscal policies and leadership in a monetary union. European Journal of Political Economy, 47. pp. 133-147. ISSN 0176-2680 doi: 10.1016/j.ejpoleco.2016.04.003

Abstract/Summary

We consider the strategic interactions between fiscal and monetary policies in a monetary union when a fiscal authority enjoys a strategic advantage. In particular, we depart from the standard literature on strategic interactions in monetary unions in that we solve a three-stage game, where the two national fiscal authorities do not play simultaneously. We find that there is always an incentive for the leader fiscal authority to play a three-stage game, which leaves the other fiscal authority worse off under demand shocks. This choice leads to more (less) volatile union-wide fiscal stance for demand (supply) shocks compared to the standard narrow-coordination case. This volatility is positively related to demand shocks' asymmetries.