Macroeconomic policy design in the European monetary union: A numerical game approach

Optimal economic reactions of European policy-makers on exogenous shocks are de-termined by simulating a global macroeconomic model under different institutional arrangements. Inparticular, it is investigated whether discretionary or rule-based policies and whether non-cooperativeor cooperative policies for Europe result in a better performance as measured by intertemporal ob-jective functions. The results show that the answers to these questions depend strongly on the natureof the shock to which European economies are exposed. For a negative supply shock, rule-basedpolicies dominate, whereas for a negative demand shock, cooperative fiscal policy-making withinthe European Monetary Union gives the best results.