Monetary policy games and international migration of labor in interdependent economies

Macroeconomic policy games have mostly been analyzed within the context of models in which the labor force is fixed. This, however, contradicts the fact that international labor flows are large, increasing and volatile. In this paper we incorporate the possibility of international migration into a monetary policy game played by governments in unionized interdependent economies. We show that contrary to usual presumptions, established by earlier studies that ignore the possibility of international migration, inter-government cooperation in the monetary field may well turn out to be advantageous. This has important implications for the European economies, since it suggests that measures taken towards encouraging international migration within EU will not only harmonize the European labor markets but will also make monetary policy cooperation within Europe, as required by the Maastrict Treaty, more advantageous.