Monetary-fiscal policy interactions and commitment versus discretion in a monetary union

We consider monetary-fiscal policy interactions in a monetary union. If mon etary and fiscal authorities have different ideal output and inflation targ ets, the Nash equilibrium output or inflation or both are beyond the ideal points of all authorities. Leadership of either authority is better. Fiscal discretion entirely negates the advantage of monetary commitment: The opti mal monetary rule is equivalent to discretionary leadership of monetary ove r fiscal policy. Agreement about ideal output and inflation creates a monet ary-fiscal symbiosis, yielding the ideal point despite disagreement about t he relative weights of the two objectives, for any order of moves, without fiscal co-ordination, and without monetary commitment. (C) 2001 Elsevier Sc ience B.V. All rights reserved.