Robust Predictions in Dynamic Policy Games

Dynamic policy games feature a wide range of equilibria. This paper provides a methodology for obtaining robust predictions. We begin by focusing on a model of sovereign debt although our methodology applies to other settings, such as models of monetary policy or capital taxation. The main result of the paper is a characterization of outcomes that are consistent with a subgame perfect equilibrium conditional on the observed history. Our methodology provides observable implications common across all equilibria that we illustrate by characterizing, conditional on an observed history, the set of all possible continuation prices of debt and comparative statistics for this set; by computing bounds on the maximum probability of a crisis; and by obtaining bounds on means and variances. In addition, we propose a general dynamic policy game and show how our main result can be extended to this general environment.