The European Monetary Union: the effects of policy coordination

Abstract

This thesis contributes to the extensive line of research about the role of coordination in the European Monetary Union. In a one-country model, Alesina and Tabellini (1987) look at the role of coordination between the fiscal and monetary authority. Beetsma and Bovenberg (1998) look at the coordination between fiscal authorities in the setting of a monetary union. They find that a setting with more fiscal authorities which are not coordinated is beneficial. By analysing these two theoretical models, this thesis tries to expand this model to other settings and includes different assumption. This is done by expanding the paper by Alesina and Tabellini (1987) to a two-country model and to change the rules of the game in the model by Beetsma and Bovenberg (1998). This thesis finds that fiscal leadership strengthens the position of the fiscal authority and leads to outcomes closer to the preferences of this authority. The beneficial results by Beetsma and Bovenberg (1998) in a setting with uncoordinated fiscal authorities is not supported by this thesis.