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Commitment and coordination in a dynamic game model of international economic policy-making

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  • Reinhard Neck
  • Engelbert Dockner

Abstract

In this paper, we consider a dynamic game model of two identical countries. Policy-makers of both countries have quadratic intertemporal objective functions and want to stabilize domestic output, domestic inflation, and the real rate of exchange. We present different analytical and numerical solutions for this policy game. Noncooperative open-loop equilibria are interpreted as requiring unilateral commitment and policy-makers' credibility. Potential gains from cooperation are present, as the noncooperative equilibrium solutions are not Pareto-optimal. Under an information pattern that admits memory strategies, the possibility of obtaining “cooperative†results without coordination and commitment arises. Copyright Kluwer Academic Publishers 1995

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File URL: http://hdl.handle.net/10.1007/BF00999041
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 6 (1995)
Issue (Month): 1 (January)
Pages: 5-28

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Handle: RePEc:kap:openec:v:6:y:1995:i:1:p:5-28

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: policy coordination; international macroeconomics; stabilization policies; dynamic game;

References

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  1. Stephen J. Turnovsky & Tamer Basar & Vasco d'Orey, 1988. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," NBER Working Papers 2467, National Bureau of Economic Research, Inc.
  2. Peter J. Stemp & Stephen J. Turnovsky, 1988. "Optimal Monetary Policy in an Open Economy," NBER Working Papers 2018, National Bureau of Economic Research, Inc.
  3. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, November.
  4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  5. Turnovsky, Stephen J, 1991. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies: Reply," American Economic Review, American Economic Association, vol. 81(5), pages 1443-45, December.
  6. Reinganum, Jennifer F & Stokey, Nancy L, 1985. "Oligopoly Extraction of a Common Property Natural Resource: The Importance of the Period of Commitment in Dynamic Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 161-73, February.
  7. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, January.
  8. Haurie, Alain & Pohjola, Matti, 1987. "Efficient equilibria in a differential game of capitalism," Journal of Economic Dynamics and Control, Elsevier, vol. 11(1), pages 65-78, March.
  9. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
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