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Policy Interactions in a Monetary Union: An Application of the OPTGAME Algorithm

In: Dynamic Games in Economics

Author

Listed:
  • Dmitri Blueschke

    (Alpen-Adria-Universität Klagenfurt)

  • Reinhard Neck

    (Alpen-Adria-Universität Klagenfurt)

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.

Suggested Citation

  • Dmitri Blueschke & Reinhard Neck, 2014. "Policy Interactions in a Monetary Union: An Application of the OPTGAME Algorithm," Dynamic Modeling and Econometrics in Economics and Finance, in: Josef Haunschmied & Vladimir M. Veliov & Stefan Wrzaczek (ed.), Dynamic Games in Economics, edition 127, pages 51-68, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-54248-0_3
    DOI: 10.1007/978-3-642-54248-0_3
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    Cited by:

    1. Neck, R. & Blueschke, D., 2016. "What to do when stagflation returns? Monetary and fiscal policy strategies for a monetary union," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 128-146.
    2. Reinhard Neck & Dmitri Blueschke, 2014. "“Haircuts” for the EMU periphery: virtue or vice?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(2), pages 153-175, May.

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