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Monetary and fiscal policy interaction and government debt stabilization

Author

Listed:
  • van Aarle, B.
  • Bovenberg, A.L.

    (Tilburg University, Center For Economic Research)

  • Raith, M.

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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Suggested Citation

  • van Aarle, B. & Bovenberg, A.L. & Raith, M., 1995. "Monetary and fiscal policy interaction and government debt stabilization," Discussion Paper 1995-1, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:3e0859f2-375c-4cf5-bf90-4555884390b7
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    References listed on IDEAS

    as
    1. 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.
    2. 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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    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. James M. Boughton, 1991. "Long-Run Money Demand in Large Industrial Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 1-32, March.
    6. Burdekin, Richard C K & Laney, Leroy O, 1988. "Fiscal Policymaking and the Central Bank Institutional Constraint," Kyklos, Wiley Blackwell, vol. 41(4), pages 647-662.
    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. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 1-10, December.
    9. Levine, Paul & Brociner, Andrew, 1994. "Fiscal policy coordination and EMU : A dynamic game approach," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 699-729.
    10. Torres,Francisco & Giavazzi,Francesco (ed.), 1993. "Adjustment and Growth in the European Monetary Union," Cambridge Books, Cambridge University Press, number 9780521440196.
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    12. Petit, Maria Luisa, 1989. "Fiscal and Monetary Policy Co-ordination: A Differential Game Approac h," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 161-179, April-Jun.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Game Theory; Central Banks; Monetary Policy; National Debt; Fiscal Policy; monetary economics;
    All these keywords.

    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; Treasury Policy
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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