A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations

Reinhard Neck () and Doris Behrens

Atlantic Economic Journal, 2009, vol. 37, issue 4, 335-349

Abstract: We consider a dynamic game model of a two-country monetary union. Governments (fiscal policies) pursue national goals while the common central bank’s monetary policy aims at union-wide objectives. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank. We consider conflicting (non-cooperative Nash equilibrium) and coordinated policy-making (cooperative Pareto solutions). We show that there is a trade-off between the deviations of instruments and targets from desired paths; the volatility of output and inflation increases when private agents react more strongly to changes in actual inflation. Copyright International Atlantic Economic Society 2009

Keywords: Dynamic game; Nash equilibrium; Pareto solution; Macroeconomics; Fiscal policy; Monetary policy; Monetary union; E63; E61; F42; C73 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:kap:atlecj:v:37:y:2009:i:4:p:335-349

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DOI: 10.1007/s11293-009-9186-6

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