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The (in)finite horizon open‐loop Nash LQ game:An application to EMU

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  • J.C. Engwerda
  • B. Aarle
  • J.E.J. Plasmans

Abstract

In this paper, we study macroeconomic stabilization in the Economic and Monetary Union(EMU) using a dynamic games approach. In modeling this problem, it turns out that theplayers include the time derivative of the state variable of the game in their performancecriterion. As far as the authors know, this kind of problem has not before been dealt withrigorously in dynamic games theoretic literature. Therefore, we first consider a generalizationof the linear‐quadratic differential game, in which we allow for cross terms in theperformance criteria. Following the analysis of Engwerda [10,12], we present formulas tocalculate open‐loop Nash equilibria for both the finite‐planning horizon and the infinite‐planninghorizon. Particular attention is paid to computational aspects. In the second part ofthis paper, we use the obtained theoretical results to study macroeconomic stabilization inthe Economic and Monetary Union (EMU). Copyright Kluwer Academic Publishers 1999

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  • J.C. Engwerda & B. Aarle & J.E.J. Plasmans, 1999. "The (in)finite horizon open‐loop Nash LQ game:An application to EMU," Annals of Operations Research, Springer, vol. 88(0), pages 251-273, January.
    • Handle: RePEc:spr:annopr:v:88:y:1999:i:0:p:251-273:10.1023/a:1018986514858
    DOI: 10.1023/A:1018986514858
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    3. Levine, Paul & Brociner, Andrew, 1994. "Fiscal policy coordination and EMU : A dynamic game approach," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 699-729.
    4. Veijo Kaitala & Matti Pohjola & Olli Tahvonen, 1992. "Transboundary air pollution and soil acidification: A dynamic analysis of an acid rain game between Finland and the USSR," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(2), pages 161-181, March.
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    6. Fershtman, Chaim & Kamien, Morton I, 1987. "Dynamic Duopolistic Competition with Sticky Prices," Econometrica, Econometric Society, vol. 55(5), pages 1151-1164, September.
    7. Turnovsky, Stephen J & Basar, Tamer & d'Orey, Vasco, 1988. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," American Economic Review, American Economic Association, vol. 78(3), pages 341-361, June.
    8. Reinhard Neck & Engelbert Dockner, 1995. "Commitment and coordination in a dynamic game model of international economic policy-making," Open Economies Review, Springer, vol. 6(1), pages 5-28, January.
    9. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    Cited by:

    1. Bas Van Aarle & Giovanni Di Bartolomeo & Jacob Engwerda & Joseph Plasmans, 2002. "Staying Together or Breaking Apart: Policy-makers’ Endogenous Coalitions Formation in the European Economic and Monetary Union," CESifo Working Paper Series 748, CESifo.
    2. Bas van Aarle & Jacob Engwerda & Joseph Plasmans, 2002. "Monetary and Fiscal Policy Interaction in the EMU: A Dynamic Game Approach," Annals of Operations Research, Springer, vol. 109(1), pages 229-264, January.
    3. van Aarle, B. & Engwerda, J.C. & Plasmans, J.E.J. & Weeren, A.J.T.M., 1999. "Monetary and Fiscal Policy Design under EMU : A Dynamic Game Approach," Other publications TiSEM 0848f398-41bb-4e43-b83e-6, Tilburg University, School of Economics and Management.
    4. Bas van Aarle & Giovanni Di Bartolomeo & Jacob Engwerda & Joseph Plasmans, 2002. "Monetary and Fiscal Policy Design in the EMU: An Overview," Open Economies Review, Springer, vol. 13(4), pages 321-340, October.
    5. Joseph Plasmans & Jacob Engwerda & Bas Van Aarle & Tomasz Michalak & Giovanni Di Bartolomeo, 2006. "Macroeconomic Stabilization Policies In The Emu: Spillovers, Asymmetries And Institutions," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(4), pages 461-484, September.
    6. Plasmans, J.E.J., 2001. "The Effects of Fiscal and Monetary Policy in an Open Economy : A Case of EU, the USA and Japan," Other publications TiSEM 26fda6a3-5cc0-43a3-894a-d, Tilburg University, School of Economics and Management.
    7. Engwerda, J.C., 2005. "Uniqueness Conditions for the Infinite-Planning Horizon Open-Loop Linear Quadratic Differential Game," Discussion Paper 2005-32, Tilburg University, Center for Economic Research.
    8. Engwerda, J.C. & van den Broek, W.A. & Schumacher, J.M., 2000. "Feedback Nash equilibria in uncertain infinite time horizon differential games," Other publications TiSEM c431993d-ee67-4a93-9e2d-f, Tilburg University, School of Economics and Management.
    9. Helton Saulo & Leandro Rêgo & Jose Divino, 2013. "Fiscal and monetary policy interactions: a game theory approach," Annals of Operations Research, Springer, vol. 206(1), pages 341-366, July.
    10. van Aarle, B. & Di Bartolomeo, G. & Engwerda, J.C. & Plasmans, J.E.J., 2001. "Monetary and fiscal policy design in the EMU using a dynamic game approach : An overview," Other publications TiSEM 355822b0-4ad6-4792-b0d6-7, Tilburg University, School of Economics and Management.
    11. Nikooeinejad, Z. & Heydari, M. & Loghmani, G.B., 2022. "A numerical iterative method for solving two-point BVPs in infinite-horizon nonzero-sum differential games: Economic applications," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 200(C), pages 404-427.
    12. Joseph Plasmans & Jacob Engwerda & Bas Aarle & Tomasz Michalak, 2009. "Analysis of a monetary union enlargement in the framework of linear-quadratic differential games," International Economics and Economic Policy, Springer, vol. 6(2), pages 135-156, July.

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