How to Manage Financial Shocks: Intra-European vs. International Monetary Coordination

Jérôme Creel (1) , Fabrice Capoen (2) , Pascal Cussy (3) , Hélène Lenoble-Liaud (4)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 CEPII - Centre d'Etudes Prospectives et d'Informations Internationales
3 CREM - Centre de recherche en économie et management
4 LEDa - Laboratoire d'Economie de Dauphine

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.

Domains: Economics and Finance

Jérôme Creel, Fabrice Capoen, Pascal Cussy, Hélène Lenoble-Liaud. How to Manage Financial Shocks: Intra-European vs. International Monetary Coordination. Journal of Macroeconomics, 2003, 25 (4), pp.431 - 455. ⟨10.1016/j.jmacro.2003.07.002⟩. ⟨hal-03416786⟩