Central bank and government in a speculative attack model
AbstractThis paper studies the interaction between monetary and fiscal authorities while investors are coordinating on a speculative attack. The authorities want to achieve specific targets for output and inflation but also to avoid a regime change (i.e. sovereign default). They use the traditional policy instruments. The model examines the informational role of simultaneous implementation of monetary and fiscal policies in coordination environments. While endogenous information generated by the intervention of one policy maker has been shown to lead to multiple equilibria, we show that if the actions chosen by the central bank and the government not only deliver information to the markets but also influence the fundamentals of the economy, when the authorities have a strong incentive to preserve the status quo over other objectives, then there is no equilibrium in which investors' strategies depend monotonically on their private information on fundamentals.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 934.
Date of creation: Sep 2013
Date of revision:
global games; complementarities; signaling; self-fulfilling expectations; multiple equilibria; crises; regime change; policy interactions;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F3 - International Economics - - International Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-CBA-2013-10-18 (Central Banking)
- NEP-CTA-2013-10-18 (Contract Theory & Applications)
- NEP-MAC-2013-10-18 (Macroeconomics)
- NEP-MON-2013-10-18 (Monetary Economics)
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