Abstract/Summary

A standard neo-Keynesian model for a monetary union in structural form, in which the monetary authority and the fiscal authorities strategically interact, is utilised to explore the macroeconomic stabilisation and welfare implications of alternative institutional arrangements under various shocks. Eight alternative institutional arrangements (combinations of strategic and fiscal regimes), five types of structural characteristics on relative policy effectiveness, and seven distinct categories and six types of shocks are considered. The importance of the structural characteristics on relative policy effectiveness in defining the policy-mix outcomes and the macroeconomic stabilisation and welfare implications of the alternative institutional arrangements under various shocks are highlighted. We provide a welfare ranking for the alternative institutional arrangements for each of the authorities involved. A conflict of interest is detected between the monetary and the fiscal authorities when fiscal policy is more effective in stabilising aggregate demand relative to inflation than monetary policy, since the former prefers the simultaneous-move strategic regime with fiscal policies’ (broad) coordination, while the national fiscal authorities prefer the fiscal leadership one, for most types of demand/supply shocks. A social planner always prefers fiscal leadership with broad coordination, irrespective of structural characteristics or categories/types of shocks.