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Monetary and fiscal policy interaction and government debt stabilization

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Author Info

  • Bas Aarle
  • Lans Bovenberg
  • Matthias Raith

Abstract

In many developing and developed countries, government debt stabilization is an important policy issue. This paper models the strategic interaction between the monetary authorities who control monetization and the fiscal authorities who control primary fiscal deficits. Government debt dynamics are driven by the interest payments on outstanding debt and the part of the primary fiscal deficits that is not monetized. Modelling the interaction as a differential game, we compare the cooperative equilibrium and the non-cooperative Nash open-loop equilibrium. The well-known unpleasant monetarist arithmetic is reinterpreted in this differential game framework. We consider also the effects of making the Central Bank more independent.

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File URL: http://hdl.handle.net/10.1007/BF01226006
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Bibliographic Info

Article provided by Springer in its journal Journal of Economics Zeitschrift für Nationalökonomie.

Volume (Year): 62 (1995)
Issue (Month): 2 (June)
Pages: 111-140

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Handle: RePEc:kap:jeczfn:v:62:y:1995:i:2:p:111-140

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Web page: http://www.springerlink.com/link.asp?id=108909

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  1. repec:nsr:niesrd:26 is not listed on IDEAS
  2. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59.
  3. Richard C.K. Burdekin & Leroy O. Laney, 1986. "Fiscal policymaking and the central bank institutional constraint," Research Paper 8606, Federal Reserve Bank of Dallas.
  4. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779.
  5. 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.
  6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  7. repec:nsr:niesrd:7 is not listed on IDEAS
  8. Levine, Paul L & Pearlman, Joseph, 1992. "Fiscal and Monetary Policy Under EMU: Credible Inflation Targets or Unpleasant Monetary Arithmetic?," CEPR Discussion Papers 701, C.E.P.R. Discussion Papers.
  9. Pete Richardson & Claude Giorno & Stephan Thurman, 1994. "Macroeconomic Performance and Fiscal Policy Adjustments in the Medium Term: Alternative Medium-Term Scenarios," OECD Economics Department Working Papers 148, OECD Publishing.
  10. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, vol. 10(4), pages 427-442, December.
  11. James M. Boughton, 1991. "Long-Run Money Demand in Large Industrial Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 1-32, March.
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Citations

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Cited by:
  1. van den Broek, W. A., 2002. "Moving horizon control in dynamic games," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 937-961, June.
  2. Engwerda, J. C., 1998. "Computational aspects of the open-loop Nash equilibrium in linear quadratic games," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1487-1506, August.
  3. repec:cbk:journl:v:2:y:2013:i:2:p:5-27 is not listed on IDEAS
  4. Willi Semmler & Wenlang Zhang, 2004. "Monetary and Fiscal Policy Interactions in the Euro Area," Empirica, Springer, vol. 31(2), pages 205-227, June.
  5. Engwerda, Jacob C., 1998. "On the open-loop Nash equilibrium in LQ-games," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 729-762, May.
  6. Broek, W.A. van den, 1999. "Moving Horizon Control in Dynamic Games," Discussion Paper 1999-07, Tilburg University, Center for Economic Research.
  7. Jacob C. Engwerda, . "Computational Aspects of the (In)finite Planning Horizon Open-loop Nash Equilibrium in LQ-Games," Computing in Economics and Finance 1996 _018, Society for Computational Economics.
  8. Valeria De Bonis & Pompeo Della Posta, 2005. "Strategic interactions between monetary and fiscal authorities in a monetary union," Working Papers de Economia (Economics Working Papers) 26, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  9. Engwerda, J.C., 2006. "Linear Quadratic Games: An Overview," Discussion Paper 2006-110, Tilburg University, Center for Economic Research.
  10. Damir Šehović, 2013. "General Aspects of Monetary and Fiscal Policy Coordination," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(3), pages 5-27.
  11. Engwerda, J.C., 2007. "Multicriteria Dynamic Optimization Problems and Cooperative Dynamic Games," Discussion Paper 2007-41, Tilburg University, Center for Economic Research.
  12. W. A. van den Broek, 1999. "Moving-Horizon Control in Dynamic Games," Computing in Economics and Finance 1999 122, Society for Computational Economics.

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