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Monetary and fiscal policy interaction and government debt stabilization

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  • Aarle, B. van
  • Bovenberg, A.L.
  • Raith, M.

    (Tilburg University, Center for Economic Research)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-1.

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

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Web page: http://center.uvt.nl

Related research

Keywords: Game Theory; Central Banks; Monetary Policy; National Debt; Fiscal Policy; monetary economics;

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References

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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.
  2. repec:nsr:niesrd:7 is not listed on IDEAS
  3. Brociner, Andrew & Levine, Paul L, 1992. "Fiscal Policy Coordination and EMU: A Dynamic Game Approach," CEPR Discussion Papers 639, C.E.P.R. Discussion Papers.
  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.
  5. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  6. 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.
  7. Levine, Paul L & Pearlman, Joseph, 1992. "Fiscal and Monetary Policy Under EMU: Credible Inflation Targets or Unpleasant Monetary Arithmetic?," CEPR Discussion Papers 701, C.E.P.R. Discussion Papers.
  8. Burdekin, Richard C K & Laney, Leroy O, 1988. "Fiscal Policymaking and the Central Bank Institutional Constraint," Kyklos, Wiley Blackwell, vol. 41(4), pages 647-62.
  9. repec:nsr:niesrd:26 is not listed on IDEAS
  10. James M. Boughton, 1991. "Long-Run Money Demand in Large Industrial Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 1-32, March.
  11. Pete Richardson & Claude Giorno & Stephan Thurman, 1994. "Macroeconomic Performance and Fiscal Policy Adjustments in the Medium Term: Alternative Medium-Term Scenarios," OECD Economics Department Working Papers 148, OECD Publishing.
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Citations

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Cited by:
  1. Engwerda, J.C., 1998. "On the open-loop Nash equilibrium in LQ-games," Open Access publications from Tilburg University urn:nbn:nl:ui:12-80026, Tilburg University.
  2. repec:cbk:journl:v:2:y:2013:i:2:p:5-27 is not listed on IDEAS
  3. 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.
  4. Engwerda, J.C., 1997. "Computational aspects of the open-loop Nash Equilibrium in linear quadratic games," Discussion Paper 1997-83, Tilburg University, Center for Economic Research.
  5. Engwerda, J.C., 2007. "Multicriteria Dynamic Optimization Problems and Cooperative Dynamic Games," Discussion Paper 2007-41, Tilburg University, Center for Economic Research.
  6. Broek, W.A. van den, 1999. "Moving Horizon Control in Dynamic Games," Discussion Paper 1999-07, Tilburg University, Center for Economic Research.
  7. Engwerda, J.C., 2006. "Linear Quadratic Games: An Overview," Discussion Paper 2006-110, Tilburg University, Center for Economic Research.
  8. 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.
  9. 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.
  10. Damir Šehović, 2013. "General Aspects of Monetary and Fiscal Policy Coordination," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(3), pages 5-27.
  11. W. A. van den Broek, 1999. "Moving-Horizon Control in Dynamic Games," Computing in Economics and Finance 1999 122, Society for Computational Economics.
  12. van den Broek, W. A., 2002. "Moving horizon control in dynamic games," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 937-961, June.

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