How to manage financial shocks: Intra-European vs. international monetary coordination

Using a four-country Mundell–Fleming model including portfolio and wealth effects, we explore the question whether some types of policy coordination could improve the outcomes of a financial shock like the Asian crisis. Time-consistent equilibria are computed: a Nash equilibrium, a target zone regim...

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Bibliographic Details
Published in:Journal of macroeconomics 2003-12, Vol.25 (4), p.431-455
Main Authors: Creel, Jérôme, Capoen, Fabrice, Cussy, Pascal, Lenoble-Liaud, Hélène
Format: Article
Language:English
Subjects:
Coordination
Economic crisis
Economic models
Economics and Finance
Equilibrium
Europe
Financial crisis
Humanities and Social Sciences
International
Macroeconomics
Monetarism
Monetary policy
Stability Pact
Studies
Target zone
Time
Time consistency
U.S.A
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Summary:Using a four-country Mundell–Fleming model including portfolio and wealth effects, we explore the question whether some types of policy coordination could improve the outcomes of a financial shock like the Asian crisis. Time-consistent equilibria are computed: a Nash equilibrium, a target zone regime and a coalition solution. The best equilibrium for all authorities except the US government is the European coalition. Introducing a Stability Pact in Europe does not alter this result. Introducing a Fed less conservative than the ECB or the BoJ provokes a change in US preferences: both authorities give priority to the target zone regime.
ISSN:0164-0704
1873-152X
DOI:10.1016/j.jmacro.2003.07.002