FISCAL-MONETARY POLICY COORDINATION AND DEBT MANAGEMENT: A TWO STAGE DYNAMIC ANALYSIS

Giovanni Di Bartolomeo () and Debora Di Gioacchino

No 74, Working Papers from Sapienza University of Rome, Department of Public Economics

Abstract: This paper studies the interaction between two autonomous policymakers, the central bank and the government, in managing public debt as the result of a two-stage game. In the first stage the institutional regime is established. This determines the equilibrium solution to be applied in the second stage, in which a differential game is played between the two policymakers. It is shown that, if the policymakers can communicate before the game is played, (multiple-equilibrium) coordination problems can be solved by using the concept of correlated equilibrium. Unlike Nash equilibrium, which only allows for individualistic and independent behaviour, a correlated equilibrium allows for the players’ behaviour to be coordinated and correlated.

Keywords: monetary and fiscal policies; differential games; correlated equilibrium. (search for similar items in EconPapers)
JEL-codes: C73 E58 F33 F42 (search for similar items in EconPapers)
Date: 2004-06
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Working Paper: FISCAL-MONETARY POLICY COORDINATION AND DEBT MANAGEMENT: A TWO STAGE DYNAMIC ANALYSIS (2005)
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