Abstract
This paper investigates for economic policy design in EMU, particularly for Stability and Growth Pact, SGP. Though the SGP was introduced for stabilization of fiscal policies in EMU, Some countries, that is, Portugal, France, Germany, and Italy have violated the pact since 2002. In 2005, the European Commission made modification of operating way of SGP, not basic reforms. However, the modification is thought to be not sufficient to stabilize the EMU in severe recession and/or regional economic disequilibrium.
We, at first, examine the fiscal policy effects with common monetary policy by using concept of game theory, to conclude the need for fiscal policy coordination. Secondly, some suggestions as to SGP reform are reviewed for our proposal. Thirdly, our proposal of SGP reform is suggested. The proposal includes fiscal transfer among member countries in EMU, which strengths stabilization to asymmetry shocks.
