Atlantic Economic Journal

, 37:335

A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations

Article

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.

Keywords

Dynamic game Nash equilibrium Pareto solution Macroeconomics Fiscal policy Monetary policy Monetary union 

JEL

E63 E61 F42 C73 

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Copyright information

© International Atlantic Economic Society 2009

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of KlagenfurtKlagenfurtAustria

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