Abstract
A good policy-mix between fiscal and monetary policies is a traditional prerequisite for economic stabilization. In a monetary union such as the European Monetary Union (EMU) the problem becomes more complex since the European Central Bank (ECB) conducts its policy for the economic zone as a whole whereas each member state can conduct its own fiscal policy. The questions then are how to deal with free-riding behaviors, and how to coordinate fiscal policies. The Stability and Growth Pact (SGP) is a way of dealing with these questions, but it is not an optimal means. The objective of this article is to analyze the efficiency conditions of a coordination rule. And from there, to establish the institutional framework best adapted to this rule. The proposed model starts from a position of perfect coordination of fiscal policies. Two cases are considered: (1) a strict coordination rule; (2) a flexible coordination rule. The first case is modeled within a symmetric information game, the second one within an asymmetric information situation. The theoretical results suggest policy implications about the optimal institutional structure in Europe.