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Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies

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  • Turnovsky, Stephen J
  • Basar, Tamer
  • d'Orey, Vasco

Abstract

This paper develops strategic monetary policies using a standard two-country macro model under flexible exchange rates. The equilibria considered include feedback Nash and feedback Stackelberg, both of which are compared to the Pareto optimal cooperative equilibrium. The optimal policies are obtained as feedback rules in which real money supplies are adjusted to movements in the real exchange rate. The properties of these policies and their welfare implications are analyzed using numerical simulations. The contrast in the present results with those obtained previously for a short-run horizon suggest the importance of both intertemporal and intratemporal tradeoffs in the d etermination of optimal strategic policies. Copyright 1988 by American Economic Association.

Suggested Citation

  • Turnovsky, Stephen J & Basar, Tamer & d'Orey, Vasco, 1988. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," American Economic Review, American Economic Association, vol. 78(3), pages 341-361, June.
  • Handle: RePEc:aea:aecrev:v:78:y:1988:i:3:p:341-61
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    References listed on IDEAS

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    1. Taylor, John B., 1985. "International coordination in the design of macroeconomic policy rules," European Economic Review, Elsevier, vol. 28(1-2), pages 53-81.
    2. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, April.
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    4. Peter J. Stemp & Stephen J. Turnovsky, 1986. "Optimal Monetary Policy in an Open Economy," NBER Working Papers 2018, National Bureau of Economic Research, Inc.
    5. Hughes Hallett, A J, 1984. "Non-cooperative Strategies for Dynamic Policy Games and the Problem of Time Inconsistency," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 381-399, November.
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    7. Martin K. Perry, 1982. "Oligopoly and Consistent Conjectural Variations," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 197-205, Spring.
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    9. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    10. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
    11. Michael Jones, 1983. "International Liquidity: A Welfare Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 1-23.
    12. Basar, Tamer & Turnovsky, Stephen J. & D'orey, Vasco, 1986. "Optimal strategic monetary policies in dynamic interdependent economies A summary paper," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 15-19, June.
    13. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters,in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
    14. Marcus Miller & Mark Salmon, 1985. "Policy Coordination and Dynamic Games," NBER Chapters,in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
    15. Hamada, Koichi, 1976. "A Strategic Analysis of Monetary Interdependence," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 677-700, August.
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    Cited by:

    1. McNelis, Paul D. & Asilis, Carlos M., 2002. "Macroeconomic policy games and asset-price volatility in the EMS: a linear quadratic control analysis of France, Germany, Italy and Spain," Economic Modelling, Elsevier, vol. 19(1), pages 1-24, January.
    2. Bas van Aarle & Giovanni Di Bartolomeo & Jacob Engwerda & Joseph Plasmans, 2002. "Staying Together or Breaking Apart: Policy-makers’ Endogenous Coalitions Formation in the European Economic and Monetary Union," CESifo Working Paper Series 748, CESifo Group Munich.
    3. J.C. Engwerda & B. Aarle & J.E.J. Plasmans, 1999. "The (in)finite horizon open‐loop Nash LQ game:An application to EMU," Annals of Operations Research, Springer, vol. 88(0), pages 251-273, January.
    4. Bas van Aarle & Giovanni Di Bartolomeo & Jacob Engwerda & Joseph Plasmans, 2002. "Monetary and Fiscal Policy Design in the EMU: An Overview," Open Economies Review, Springer, vol. 13(4), pages 321-340, October.
    5. Giovanni Di Bartolomeo & Debora Di Gioacchino, 2008. "Fiscal-monetary policy coordination and debt management: a two-stage analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(4), pages 433-448, September.
    6. Nicola Acocella & Giovanni Di Bartolomeo, 2005. "Non-neutrality of economic policy: An application of the Tinbergen-Theil’s approach to a strategic context," Macroeconomics 0504035, EconWPA, revised 26 Apr 2005.
    7. Bas van Aarle & Jacob Engwerda & Joseph Plasmans, 2002. "Monetary and Fiscal Policy Interaction in the EMU: A Dynamic Game Approach," Annals of Operations Research, Springer, vol. 109(1), pages 229-264, January.
    8. McNelis, Paul D. & Asilis, Carlos M., 1995. "Monetary policy games with broad money targets a linear quadratic control analysis of the U.S. and Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1091-1111.
    9. Jacob Opolot & Anita Mpagi, 2017. "Inflation Dynamics in Uganda: The role of disequilibria in the money and traded goods markets," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 6(1), pages 1-2.
    10. M. Isabel García Gracia, 1995. "El SME: un modelo de comportamiento asimétrico," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 3, pages 41-68, Junio.
    11. VAN AARLE, Bas & ENGWERDA, Jacob C. & PLASMANS, Joseph E.J. & WEEREN, Arie, 1999. "Monetary and fiscal policy design under EMU: a dynamic game approach," Working Papers 1999041, University of Antwerp, Faculty of Applied Economics.
    12. Osberg, L., 1995. "The Equity/Efficiency Trade-Off in Retrospect," Department of Economics at Dalhousie University working papers archive 95-04, Dalhousie, Department of Economics.
    13. repec:fgv:epgrbe:v:68:n:2:a:5 is not listed on IDEAS
    14. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 171-199, September.
    15. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, vol. 9(3), pages 265-284, July.
    16. Karras, Georgios, 1999. "Openness and the effects of monetary policy," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 13-26, January.
    17. Engwerda, Jacob C. & van Aarle, Bas & Plasmans, Joseph E. J., 2002. "Cooperative and non-cooperative fiscal stabilization policies in the EMU," Journal of Economic Dynamics and Control, Elsevier, vol. 26(3), pages 451-481, March.
    18. 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.
    19. Marçal, Emerson Fernandes, 2013. "Exchange rate misalignments, interdependence, crises, and currency wars: an empirical assessment," Textos para discussão 348, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    20. Karras Georgios, 1999. "Monetary Policy and the Exchange Rate: The Role of Openness," International Economic Journal, Taylor & Francis Journals, vol. 13(2), pages 75-88.
    21. Keshab Raj Bhattarai & Sushanta K. Mallick, 2015. "Macroeconomic policy coordination in the global economy: VAR and BVAR-DSGE analyses," EcoMod2015 8610, EcoMod.
    22. Kirsanova, Tatiana & Vines, David & Wren-Lewis, Simon, 2006. "Fiscal Policy and Macroeconomic Stability Within a Currency Union," CEPR Discussion Papers 5584, C.E.P.R. Discussion Papers.
    23. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series 2534, CESifo Group Munich.
    24. Marçal, Emerson Fernandes, 2014. "Desalinhamentos Cambiais, Interdependência, Crises, Guerras cambiais: Uma avaliação empírica," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(2), June.
    25. Chen, Baoline & Zadrozny, Peter A., 2002. "An anticipative feedback solution for the infinite-horizon, linear-quadratic, dynamic, Stackelberg game," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1397-1416, August.

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