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A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations

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  • Reinhard Neck
  • Doris Behrens

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

Suggested Citation

  • Reinhard Neck & Doris Behrens, 2009. "A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(4), pages 335-349, December.
    • Handle: RePEc:kap:atlecj:v:37:y:2009:i:4:p:335-349
    DOI: 10.1007/s11293-009-9186-6
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    References listed on IDEAS

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    1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, September.
    2. Marcus Miller & Mark Salmon, 1985. "Policy Coordination and Dynamic Games," NBER Chapters, in: International Economic Policy Coordination, pages 184-227, National Bureau of Economic Research, Inc.
    3. Gottfried Haber & Reinhard Neck & Warwick McKibbin, 2002. "Global Implications of Monetary and Fiscal Policy Rules in the EMU," Open Economies Review, Springer, vol. 13(4), pages 363-379, October.
    4. Petit,Maria Luisa, 2009. "Control Theory and Dynamic Games in Economic Policy Analysis," Cambridge Books, Cambridge University Press, number 9780521127158, September.
    5. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, September.
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    Cited by:

    1. Dmitri Blueschke & Reinhard Neck, 2011. "“Core” and “Periphery” in a Monetary Union: A Macroeconomic Policy Game," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(3), pages 334-346, August.
    2. Reinhard Neck & Dmitri Blueschke, 2014. "“Haircuts” for the EMU periphery: virtue or vice?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(2), pages 153-175, May.
    3. Christos Mavrodimitrakis, 2022. "Debt stabilization and financial stability in a monetary union: Market versus authority‐based preventive solutions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2582-2599, April.
    4. repec:kap:iaecre:v:17:y:2011:i:3:p:334-346 is not listed on IDEAS

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    More about this item

    Keywords

    Dynamic game; Nash equilibrium; Pareto solution; Macroeconomics; Fiscal policy; Monetary policy; Monetary union; E63; E61; F42; C73;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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