SFB 303 Discussion Paper No. B-187

Author: Klein, Martin
Title: Delors and the Core: Cooperative Monetary Policy Games and the Transition to EMU
Abstract: This paper constructs a cooperative monetary policy game to model the policy choice in a fixed exchange rate arrangement between two countries. Bargaining arises because the countries' joint decision to maintain a fixed exchange rate leaves them with a degree of freedom with respect to the allocation of adjustment duties between them. The paper demonstrates how a solution for the bargaining game can be constructed and uses simulation methods to assess how the solution is affected by the parameters of the macro model. The model is used to investigate the difference between a monetary union and a fixed exchange rate arrangement with bargaining. One of the main results is that the allocation of adjustment between countries operates quite differently in these two systems. A fixed exchange rate arrangement tends to favor large member countries wheras a monetary union gives countries equal weights or even favors the small countries.
Creation-Date: April 1990
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