Fiscal and Monetary Policy Co-ordination: A Differential Game Approac h

Maria Luisa Petit

Journal of Applied Econometrics, 1989, vol. 4, issue 2, 161-79

Abstract: In this paper the interaction between the Treasury and the central bank is examined in the case of both cooperative and non-cooperative behavior. Differential games are used in the framework of a continuous-time econometric model of the Italian economy. The Nash and the Stackelberg non-cooperative equilibrium solutions are computed, and the case for cooperation is analyzed by considering the Nash and the Kalai-Smorodinsky bargaining models. It is shown that, in the Italian case, the government has a stronger bargaining position than the central bank. A comparison is then made between the different solutions to show that the drawbacks that emerge from non-cooperation are not simply those depending on the players' payoffs. Other features are in fact considered which constitute a further argument for policy co-ordination. Copyright 1989 by John Wiley & Sons, Ltd.

Date: 1989
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