Does a Monetary Union Require International Fiscal Policy Co-ordination?

I n the debate over the set up of a single European currency, one of the principal areas of concern has been the implication of a single currency for the behaviour of sovereign fiscal authorities, and the possible need to con­ strain this behaviour. 1 The importance of this problem wil l clearly depend upon the degree of effective independence that a European Central Bank can establish. However, even with a Central Bank that is independent in the sense that i t is not bound by mandate to purchase any national government debt, there wi l l still remain a situation of strategic interaction between,many sovereign fiscal authorities and the Central Bank. What are the likely out­ comes of this strategic interaction? This paper presents a theoretical analysis designed to provide some pos­ sible answers to this question. We look at a situation where the set-up of a monetary union alters the strategic environment within which fiscal auth­ orities operate. This alteration can have profound effects on the behaviour of