Optimal Monetary Policy and the Asset Market:A Non-cooperative Game

Christos Ioannidis, and Oreste Napolitano ()

Public Policy Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: In this paper we construct a model of a policy game in order to analyse the optimal reaction function of the Central Bank to a shock in the asset market. In doing so, we consider three different noncooperative games: Nash equilibrium, Stackelberg equilibrium with “FED” as leader and “ECB” Stacklberg as leader. Three major conclusions can be drawn from our work in the presence of asset market shocks. First, in the Nash equilibrium the ECB will adopt a less restrictive monetary policy compared to the FED’s behaviour. Second, comparing the Nash and Stackelberg non-cooperative equilibria, the Stackelberg solution is certainly superior when the FED is the leader, but the Nash solution is superior for the follower. Finally, irrespective of where the shocks originate, if the FED would choose the Stackelberg leader equilibrium the ECB would minimize its social loss along with a lower level of interest rates.

Pages: 23 pages
Date: 2003-12
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-reg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.brunel.ac.uk/329/efwps/03-25.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.brunel.ac.uk/329/efwps/03-25.pdf [301 Moved Permanently]--> https://www.brunel.ac.uk/329/efwps/03-25.pdf)

Related works:
Working Paper: Optimal Monetary Policy and the Asset Market:A Non-cooperative Game (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bru:bruppp:03-25

Access Statistics for this paper

More papers in Public Policy Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University Brunel University, Uxbridge, Middlesex UB8 3PH, UK.
Bibliographic data for series maintained by John.Hunter ().