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Fiscal- Monetary Policy and Debt Management: a Two Stage Dynamic Analysis

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  • Giovanni Di Bartolomeo
  • Debora Di Gioacchino

Abstract

This paper studies the interaction between two autonomous policymakers, the central bank and the government, in managing public debt as the result of a two-stage game. In the first stage the institutional regime is established. This determines the equilibrium solution to be applied in the second stage, in which a differential game is played between the two policymakers. It is shown that, if the policymakers can communicate before the game is played, (multiple-equilibrium) coordination problems can be solved by using the concept of correlated equilibrium. Unlike Nash equilibrium, which only allows for individualistic and independent behaviour, a correlated equilibrium allows for the players’ behaviour to be coordinated and correlated.

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Bibliographic Info

Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 74.

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Length: 30
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:sap:wpaper:wp74

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Related research

Keywords: monetary and fiscal policies; differential games; correlated equilibrium.;

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  1. Reinhard Neck & Engelbert Dockner, 1995. "Commitment and coordination in a dynamic game model of international economic policy-making," Open Economies Review, Springer, vol. 6(1), pages 5-28, January.
  2. Russell W. Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," NBER Working Papers 7607, National Bureau of Economic Research, Inc.
  3. Aarle, B. van & Bartolomeo, G. di & Engwerda, J.C. & Plasmans, J.E.J., 2001. "Monetary and fiscal policy design in the EMU using a dynamic game approach: An overview," Open Access publications from Tilburg University 2001.19, Tilburg University.
  4. Sergiu Hart & Andreu Mas-Colell, 2000. "A Simple Adaptive Procedure Leading to Correlated Equilibrium," Econometrica, Econometric Society, vol. 68(5), pages 1127-1150, September.
  5. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
  6. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.
  7. Sergiu Hart & Andreu Mas-Colell, 1999. "A general class of adaptative strategies," Economics Working Papers 373, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October.
  9. Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 2004. "Political support for anti-inflationary monetary policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 187-200.
  10. Ecchia, Giulio & Mariotti, Marco, 1998. "Coalition formation in international environmental agreements and the role of institutions," European Economic Review, Elsevier, vol. 42(3-5), pages 573-582, May.
  11. 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.
  12. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, October.
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