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A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations

  • Reinhard Neck

    ()

  • Doris Behrens

We consider a dynamic game model of a two-country monetary union. Governments (fiscal policies) pursue national goals while the common central bank’s monetary policy aims at union-wide objectives. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank. We consider conflicting (non-cooperative Nash equilibrium) and coordinated policy-making (cooperative Pareto solutions). We show that there is a trade-off between the deviations of instruments and targets from desired paths; the volatility of output and inflation increases when private agents react more strongly to changes in actual inflation. Copyright International Atlantic Economic Society 2009

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File URL: http://hdl.handle.net/10.1007/s11293-009-9186-6
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Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 37 (2009)
Issue (Month): 4 (December)
Pages: 335-349

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Handle: RePEc:kap:atlecj:v:37:y:2009:i:4:p:335-349
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  1. repec:cup:cbooks:9780521337809 is not listed on IDEAS
  2. repec:cup:cbooks:9780521637329 is not listed on IDEAS
  3. 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.
  4. Gottfried Haber & Reinhard Neck & Warwick McKibbin, 2002. "Global Implications of Monetary and Fiscal Policy Rules in the EMU," Open Economies Review, Springer, vol. 13(4), pages 363-379, October.
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