How do Debt Constraints Affect Fiscal and Monetary Policies Interaction in a Strategic Monetary Union

Abstract

In this paper a mu lti-country model is adopted in order to analyze the interaction between monetary and fiscal policy in a monetary union. The setup allo ws analyzing the consequences for the policy mix when national governments face a budget constraint and take their decisions on the basis of national macroeconomic data, while the central bank focuses on the union-wide average data. Under these circu mstances it is shown that the governments' reaction to monetary policy and to supply shocks is not univocal anymore. This feature also affects the outcome of the Nash equilibriu m.