DP4647 Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU

Author(s): Sylvester C W Eijffinger, Matteo Governatori
Publication Date: September 2004
Keyword(s): asymmetric fiscal rules, decentralized fiscal policy, EMU, stability and growth pact
JEL(s): E61, H30, H60, H70
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4647

The Paper builds a simplified model describing the economy of a currency union with decentralized national fiscal policy, where the main features characterizing the policy-making are similar to those in EMU. National governments choose the size of deficit taking into account the two main rules of the Stability and Growth Pact on public finance. Unlike previous literature the asymmetric working of those rules is explicitly modeled in order to identify its impact on the Nash equilibrium of deficits arising from a game of strategic interaction between fiscal authorities in the union.