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A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations

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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.

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Authors and Affiliations

  1. Department of Economics, University of Klagenfurt, Universitaetsstrasse 65-67, 9020, Klagenfurt, Austria

    Reinhard Neck & Doris A. Behrens

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  1. Reinhard Neck
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  2. Doris A. Behrens
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Correspondence to Reinhard Neck.

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Neck, R., Behrens, D.A. A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations. Atl Econ J 37, 335–349 (2009). https://doi.org/10.1007/s11293-009-9186-6

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  • DOI: https://doi.org/10.1007/s11293-009-9186-6

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