Coalitions and dynamic interactions between fiscal and monetary authorities in the EMU

The EMU is an highly integrated economic area where externalities occur. Therefore, in this context interaction of monetary and fiscal policies is a crucial issue. This paper focuses on how coalitions among policy-makers are formed and what are their effects on the stabilization of output and price. We emphasize the role played by the institutional design of "cooperation forums". If the coalition formation game is played without communication among the policy-makers full cooperation is either impossible or limited. On the other hand, if policy-makers can communicate, full cooperation becomes a possible equilibrium, while the complete non-cooperative solution is not a sustainable equilibrium. This contrast begins to provide broad support for the view that institutions and international forums for discussions can play a crucial role in achieving international cooperation even when these institutions are not endowed with enforcement powers.