STABILITY OF MULTI–COUNTRY UNIONS: GAME THEORETIC ISSUES AND POLICY IMPLICATIONS ∗

Multicountry unions pose stability problems that can be tackled by dynamic game models of non– conventional form, with payoff functions replaced by subsets of the state–space. A country aspiring to join a multicountry union must guarantee that a set of economic indicators stay within the bounds dictated by the union. Mathematically, this translates into membership of the state vector to a convex set. When such a set–membership holds notwithstanding policy actions of other member countries (under the domestic constraints imposed to each) the overall system exhibits a kind of macroeconomic stability termed in this paper an Invariant Equilibrium. The paper presents this theory in the case of two–person linear discrete–time games and discusses the significance of the results for economic policy