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Monetary and Fiscal Policy Interaction and Government Debt Stabilization

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Author Info
Aarle, B. van
Bovenberg, L.
Raith, M. (Tilburg University, Center for Economic Research)

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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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Publisher Info
Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:19951

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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  1. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59. [Downloadable!] (restricted)
  2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Engwerda, J.C., 2007. "Multicriteria Dynamic Optimization Problems and Cooperative Dynamic Games," Discussion Paper 2007-41, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Broek, W.A. van den, 1999. "Moving horizon control in dynamic games," Discussion Paper 7, Tilburg University, Center for Economic Research. [Downloadable!]
  3. Willi Semmler & Wenlang Zhang, 2004. "Monetary and Fiscal Policy Interactions in the Euro Area," Economic Change and Restructuring, Springer, vol. 31(2), pages 205-227, June. [Downloadable!] (restricted)
    Other versions:
  4. 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. [Downloadable!]
  5. Engwerda, J.C., 1996. "On the open-loop Nash equilibrium in LQ-games," Research Memorandum 726, Tilburg University, Faculty of Economics and Business Administration. [Downloadable!]
    Other versions:
  6. 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. [Downloadable!]
  7. W. A. van den Broek, 1999. "Moving-Horizon Control in Dynamic Games," Computing in Economics and Finance 1999 122, Society for Computational Economics. [Downloadable!]
  8. Engwerda, J.C. & Weeren, A.J.T.M., 1995. "The Open-Loop Nash Equilibrium in LQ-Games Revisited," Discussion Paper 51, Tilburg University, Center for Economic Research. [Downloadable!]
  9. Engwerda, Jacob, 2006. "Linear quadratic games : an overview," Discussion Paper 110, Tilburg University, Center for Economic Research. [Downloadable!]
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