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Monetary and fiscal policy interaction and government debt stabilization

  • Bas Aarle
  • Lans Bovenberg
  • Matthias Raith

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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File URL: http://hdl.handle.net/10.1007/BF01226006
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Article provided by Springer in its journal Journal of Economics Zeitschrift für Nationalökonomie.

Volume (Year): 62 (1995)
Issue (Month): 2 (June)
Pages: 111-140

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Handle: RePEc:kap:jeczfn:v:62:y:1995:i:2:p:111-140
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=108909

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  1. repec:nsr:niesrd:7 is not listed on IDEAS
  2. 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.
  3. 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.
  4. 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 10, 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. 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.
  7. repec:nsr:niesrd:26 is not listed on IDEAS
  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. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59.
  10. 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.
  11. 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.
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