Abstract
In this chapter we present an application of the dynamic tracking games framework to a monetary union. We use a small stylized nonlinear two-country macroeconomic model (MUMOD1) of a monetary union to analyse the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm we calculate equilibrium solutions for four game strategies: one cooperative (Pareto optimal) and three non-cooperative games: the Nash game for the open-loop information pattern, the Nash game for the feedback information pattern, and the Stackelberg game for the feedback information pattern. Applying the OPTGAME algorithm to the MUMOD1 model we show how the policy makers react to demand and supply shocks according to different solution concepts. Some comments are given on possible applications to the recent sovereign debt crisis in Europe.
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Acknowledgements
An earlier version of this paper was presented at the 12th Viennese Workshop on Optimal Control, Dynamic Games and Nonlinear Dynamics. Thanks are due to very helpful comments and suggestions by participants at this symposium and an anonymous referee.
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Blueschke, D., Neck, R. (2014). Policy Interactions in a Monetary Union: An Application of the OPTGAME Algorithm. In: Haunschmied, J., Veliov, V., Wrzaczek, S. (eds) Dynamic Games in Economics. Dynamic Modeling and Econometrics in Economics and Finance, vol 16. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-54248-0_3
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DOI: https://doi.org/10.1007/978-3-642-54248-0_3
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