Global Macroeconomic Policy Implications of an Enlarged EMU

This paper examines the design of macroeconomic policies after the enlargement of the EU by Central and Eastern European countries (CEECs). We consider scenarios with and without CEECs being members of the European Economic and Monetary Union (EMU). For the European Central Bank, we analyze consequences of monetary versus inflation targeting. For European fiscal policies, we assume that the governments of incumbent and new members either refrain from pursuing active stabilization policies or follow either non-cooperative or cooperative activist fiscal policies. We analyze global effects of different European institutional arrangements under varying assumptions about policy reactions of the USA. Different scenarios are simulated with the macroeconomic McKibbin-Sachs Model (MSG2 Model), and the resulting welfare orderings are determined. They show that the advantages and disadvantages of different policy arrangements depend on the nature and scope of the shock the economies are faced with and on the assumptions made about policy feedbacks from outside Europe.