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Fiscal and monetary policy interactions: a game theory approach

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  • Helton Saulo
  • Leandro Rêgo
  • Jose Divino

Abstract

The interaction between fiscal and monetary policy is analyzed by means of a game theory approach. The coordination between these two policies is essential, since decisions taken by one institution may have disastrous effects on the other one, resulting in welfare loss for the society. We derived optimal monetary and fiscal policies in context of three coordination schemes: when each institution independently minimizes its welfare loss as a Nash equilibrium of a normal form game; when an institution moves first and the other follows, in a mechanism known as the Stackelberg solution; and, when institutions behave cooperatively, seeking common goals. In the Brazilian case, a numerical exercise shows that the smallest welfare loss is obtained under a Stackelberg solution which has the monetary policy as leader and the fiscal policy as follower. Under the optimal policy, there is evidence of a strong distaste for inflation by the Brazilian society. Copyright Springer Science+Business Media New York 2013

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  • Helton Saulo & Leandro Rêgo & Jose Divino, 2013. "Fiscal and monetary policy interactions: a game theory approach," Annals of Operations Research, Springer, vol. 206(1), pages 341-366, July.
    • Handle: RePEc:spr:annopr:v:206:y:2013:i:1:p:341-366:10.1007/s10479-013-1379-3
    DOI: 10.1007/s10479-013-1379-3
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    4. Roger Alejandro Banegas Rivero & Marco Alberto Nunez Ramirez & Sacnicte Valdez Del Rio, 2021. "Interaction of Economic Policy. Lessons on Social Welfare and Risk Premium," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 17(1), pages 7-29.
    5. Kim, Jeong-Yoo & Choi, Hyung Sun, 2023. "Monetary policy, fiscal policy and cross signal jamming," Journal of Macroeconomics, Elsevier, vol. 75(C).
    6. Muhammad Ali Nasir & Alaa M. Soliman & Muhammad Shahbaz, 2021. "Operational aspect of the policy coordination for financial stability: role of Jeffreys–Lindley’s paradox in operations research," Annals of Operations Research, Springer, vol. 306(1), pages 57-81, November.
    7. Z. Nikooeinejad & M. Heydari & M. Saffarzadeh & G. B. Loghmani & J. Engwerda, 2022. "Numerical Simulation of Non-cooperative and Cooperative Equilibrium Solutions for a Stochastic Government Debt Stabilization Game," Computational Economics, Springer;Society for Computational Economics, vol. 59(2), pages 775-801, February.
    8. Dat Thanh Nguyen & Viet Anh Hoang, 2020. "Monetary Consequences of Fiscal Stress in a Game Theoretic Framework," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 125-164.

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