Strategic interactions among central bank and national fiscal authorities in a monetary unionsubject to asymmetric country shocks

In this paper we extend Nordhaus’ (Brookings Pap Econ Act(2):139–199, 1994) results to an environment which may represent the currentEuropean situation, characterised by a single monetary authority and severalfiscal bodies. We show that, even assuming that the monetary and the fiscalauthorities share the same ideal targets, in the presence of asymmetric shocksthe “symbiosis” result found by Dixit and Lambertini (J Int Econ 60:235–247,2003) no longer obtains. Thus, fiscal rules as those envisaged in the MaastrichtTreaty and in the Stability and Growth Pact may work as monetary/fiscalcoordination devices that improve welfare. The imposition of common targets,however, may work as a substitute for policy coordination only if these aremade state contingent, an aspect that the recent version of the Stability andGrowth Pact takes into account in a more appropriate way than its originalversion.