The advantage of international fiscal cooperation under alternative monetary regimes

We consider the strategic interplay between international monetary and fiscal cooperation in a world of interdependent economies. Motivated by the ongoing discussion of monetary unification of Europe, focus is on monetary cooperation, and in particular how its performance is altered by the introduction of fiscal (tax) cooperation. Our main result is that fiscal cooperation may be disadvantageous when monetary cooperation lacks credibility with private sectors. On the other hand, fiscal cooperation under a rule based monetary regime is always advantageous