The interaction of Monetary and Fiscal policy in Monetary union

The Economic and Monetary Union of Europe has a common central bank that conducts a common monetary policy, but each country's fiscal policy is determined by its own government. We suppose that common central bank is more conservative than the fiscal authorities that run fiscal policies in the member countries. It is very useful to use in these interactions methods of game theory, like concept of Nash equilibrium. Our results suggest that, when there is a conflict of objectives among the monetary and fiscal policies, cooperation may fail to improve economic outcomes. Careful design of monetary and fiscal institutions so as to make the central bank and the government agree on the ideal levels of output and inflation leads to better outcomes. In that case, the desired goals are achieved despite any disagreement about the relative importance of the two goals, despite lack of cooperation among the policymakers and without the need for monetary commitment.