Analysis of a monetary union enlargement in the framework of linear-quadratic differential games

J.E.J. Plasmans, J.C. Engwerda, B. van Aarle, T. Michalak

Research output: Contribution to journalArticleScientificpeer-review

Abstract

"This paper studies the effects of a monetary union enlargement using the techniques and outcomes from an extensive research project on macroeconomic policy coordination in the EMU. Our approach is characterized by two main pillars: (i) linear-quadratic differential games to capture externalities, spillovers and strategic behaviour of (fiscal and monetary) players; and (ii) endogenous coalition formation concepts which enable us to study a creation and stability of different cooperation arrangements. In this paper we focus on the first pillar and construct a multi-player linear-quadratic continuous-time model of 5 countries and 4 central banks to evaluate effects of accession of a new member to an existing MU. Our findings stress the importance of an asymmetric shock confirming basic results of the OCA theory. It comes out that in our setting it is never profitable to enlarge the monetary union when there is a risk of an asymmetric shock. What is more, the potential losses from accession are so high that it can be barely possible to design a transfer system to compensate for a worse situation of some countries.
Original languageEnglish
Pages (from-to)135-156
JournalInternational Economics and Economic Policy
Volume6
Issue number2
Publication statusPublished - 2009

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Linear quadratic differential games
Enlargement
Asymmetric shocks
Accessions
Monetary union
Coalition formation
Fiscal
Macroeconomic policy
Central bank
Spillover
Strategic behavior
Externalities
Policy coordination
Continuous-time model

Cite this

Plasmans, J. E. J., Engwerda, J. C., van Aarle, B., & Michalak, T. (2009). Analysis of a monetary union enlargement in the framework of linear-quadratic differential games. International Economics and Economic Policy, 6(2), 135-156.
Plasmans, J.E.J. ; Engwerda, J.C. ; van Aarle, B. ; Michalak, T. / Analysis of a monetary union enlargement in the framework of linear-quadratic differential games. In: International Economics and Economic Policy. 2009 ; Vol. 6, No. 2. pp. 135-156.
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Plasmans, JEJ, Engwerda, JC, van Aarle, B & Michalak, T 2009, 'Analysis of a monetary union enlargement in the framework of linear-quadratic differential games', International Economics and Economic Policy, vol. 6, no. 2, pp. 135-156.

Analysis of a monetary union enlargement in the framework of linear-quadratic differential games. / Plasmans, J.E.J.; Engwerda, J.C.; van Aarle, B.; Michalak, T.

In: International Economics and Economic Policy, Vol. 6, No. 2, 2009, p. 135-156.

Research output: Contribution to journalArticleScientificpeer-review

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