On Policy Interactions among Nations: When Do Cooperation and Commitment Matter?

Hubert Kempf and Leopold von Thadden
Working Paper 2008-5
February 2008

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This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are nontrivial issues. Yet in linear-quadratic models with multiple policymakers, commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is sufficiently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations.

JEL classification: E52, E63

Key words: monetary policy, fiscal regimes

The authors thank Dale Henderson, Alex Cukierman, Russell Cooper, Eric Leeper, Wolfgang Leininger, Giovanni Lombardo, Beatrix Paal, Martin Schneider, Myrna Wooders, and seminar participants at the Atlanta Fed, the European Central Bank, the Social Science Research Center Berlin, Austin University, Université Paris 1, Dortmund University, the 2007 Society for Economic Dynamics meetings, the 2007 Association for Public Economic Theory meetings, and the 2007 European Economic Association and the Econometric Society meetings for helpful comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, the Banque de France, or the European Central Bank. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Hubert Kempf, Research Department, Banque de France and the Université Paris 1 Panthéon-Sorbonne, 12 Place du Panthéon, 75231 Paris, France, hubert.kempf@banque-france.fr, or Leopold von Thadden, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany, leopold.von_thadden@ecb.int.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.