Macroeconomic Interdependence and Policy Coordination Between the U.S. and Europe

This paper analyzes the nature of macroeconomic interdependence between the U.S. and the E.E.C. countries and examine the implications of cooperative and noncooperative approaches to formulating domestic monetary and fiscal policies. There is considerable evidence that labour markets in the U.S. and Europe behave differently: while nominal wages are sticky in the U.S., real wages are sticky in Europe. This paper explores game-theoretically, the consequences of different monetary-fiscal policy mixes and demonstrates that incentives to cooperate depend on the policy instruments chosen. Finally, we suggest some rules of the international policy game that help move the noncooperative equilibrium closer to the cooperative outcome.