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Uncertainty and the choice of instruments in a two-country monetary-policy game

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  • Dale Henderson
  • Ning Zhu

Abstract

In the two-country, monetary-policy game of this paper, each policymaker can choose his money supply or his interest rate as his instrument. With no uncertainty there are four noncooperative equilibria, one for each possible instrument pair. A policymaker is indifferent between instruments: his payoff depends not on his choice but on his opponent's. With uncertainty, the number of equilibria is reduced, sometimes to one. A policymaker is not indifferent between instruments; his payoff depends on his choice as well as on his opponent's. In some cases each policymaker prefers the equilibrium instrument choice of his opponent, but in others at least one would prefer another choice. Copyright Kluwer Academic Publishers 1990

Suggested Citation

  • Dale Henderson & Ning Zhu, 1990. "Uncertainty and the choice of instruments in a two-country monetary-policy game," Open Economies Review, Springer, vol. 1(1), pages 39-65, February.
    • Handle: RePEc:kap:openec:v:1:y:1990:i:1:p:39-65
    DOI: 10.1007/BF01886175
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    References listed on IDEAS

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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
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    5. Giavazzi, Francesco & Giovannini, Alberto, 1986. "Monetary Policy Interactions under Managed Exchange Rates," CEPR Discussion Papers 123, C.E.P.R. Discussion Papers.
    6. Turnovsky, Stephen J. & d'Orey, Vasco, 1989. "The choice of monetary instrument in two interdependent economies under uncertainty," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 121-133, January.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    8. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
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    Cited by:

    1. Dennis W. Jansen & Ming‐Jang Weng, 1999. "A K% Money Growth Leadership Rule In An International Monetary Policy Game," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 506-516, October.
    2. Dale W. Henderson & Ning S. Zhu, 1995. "Uncertainty, instrument choice, and the uniqueness of Nash equilibrium: microeconomic and macroeconomic examples," International Finance Discussion Papers 526, Board of Governors of the Federal Reserve System (U.S.).
    3. Dennis W. Jansen & Liqun Liu & Ming‐Jang Weng, 2007. "Sustainability Of The Friedman Rule In An International Monetary Policy Game," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 470-486, July.
    4. Hui, George W. L., 1995. "Flexible exchange rates, capital mobility, and monetary instruments of asymmetric economies," International Review of Economics & Finance, Elsevier, vol. 4(2), pages 149-169.
    5. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, vol. 9(3), pages 265-284, July.
    6. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2007. "International Transmission and Monetary Policy Cooperation," NBER Chapters, in: International Dimensions of Monetary Policy, pages 157-192, National Bureau of Economic Research, Inc.

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