Macroeconomic Policy Games

Martin Bodenstein, Luca Guerrieri and Joe LaBriola ()

No 2014-87, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and extends these results by highlighting their sensitivity to the choice of policy instrument. For the second example, a central bank and a macroprudential regulator are assigned distinct objectives in a model with financial frictions. Lack of coordination leads to large welfare losses even if technology shocks are the only source of fluctuations.

Keywords: Optimal policy; strategic interaction; welfare analysis; monetary policy cooperation; macroprudential regulations (search for similar items in EconPapers)
JEL-codes: E44 E61 F42 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2014-09-23
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Journal Article: Macroeconomic policy games (2019)
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