Optimal Monetary Policy and the Asset Market:A Non-cooperative Game
AbstractIn this paper we construct a model of a policy game in order to analyse the optimal reaction function of the Central Bank to a shock in the asset market. In doing so, we consider three different noncooperative games: Nash equilibrium, Stackelberg equilibrium with “FED” as leader and “ECB” Stacklberg as leader. Three major conclusions can be drawn from our work in the presence of asset market shocks. First, in the Nash equilibrium the ECB will adopt a less restrictive monetary policy compared to the FED’s behaviour. Second, comparing the Nash and Stackelberg non-cooperative equilibria, the Stackelberg solution is certainly superior when the FED is the leader, but the Nash solution is superior for the follower. Finally, irrespective of where the shocks originate, if the FED would choose the Stackelberg leader equilibrium the ECB would minimize its social loss along with a lower level of interest rates.
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Bibliographic InfoPaper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Public Policy Discussion Papers with number 03-25.
Length: 23 pages
Date of creation: Dec 2003
Date of revision:
Contact details of provider:
Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK
Other versions of this item:
- Christos Ioannidis, & Oreste Napolitano, 2003. "Optimal Monetary Policy and the Asset Market:A Non-cooperative Game," Economics and Finance Discussion Papers 03-25, Economics and Finance Section, School of Social Sciences, Brunel University.
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