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Fiscal- Monetary Policy and Debt Management: a Two Stage Dynamic Analysis

Author

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  • Giovanni Di Bartolomeo
  • Debora Di Gioacchino

Abstract

This paper studies the interaction between two autonomous policymakers, the central bank and the government, in managing public debt as the result of a two-stage game. In the first stage the institutional regime is established. This determines the equilibrium solution to be applied in the second stage, in which a differential game is played between the two policymakers. It is shown that, if the policymakers can communicate before the game is played, (multiple-equilibrium) coordination problems can be solved by using the concept of correlated equilibrium. Unlike Nash equilibrium, which only allows for individualistic and independent behaviour, a correlated equilibrium allows for the players’ behaviour to be coordinated and correlated.

Suggested Citation

  • Giovanni Di Bartolomeo & Debora Di Gioacchino, 2004. "Fiscal- Monetary Policy and Debt Management: a Two Stage Dynamic Analysis," Working Papers 74, University of Rome La Sapienza, Department of Public Economics.
  • Handle: RePEc:sap:wpaper:wp74
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    References listed on IDEAS

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    1. 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.
    2. Sergiu Hart & Andreu Mas-Colell, 2000. "A Simple Adaptive Procedure Leading to Correlated Equilibrium," Econometrica, Econometric Society, vol. 68(5), pages 1127-1150, September.
    3. Russell Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," Econometric Society World Congress 2000 Contributed Papers 0529, Econometric Society.
    4. Hart, Sergiu & Mas-Colell, Andreu, 2001. "A General Class of Adaptive Strategies," Journal of Economic Theory, Elsevier, vol. 98(1), pages 26-54, May.
    5. Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 2004. "Political support for anti-inflationary monetary policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 187-200.
    6. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
    7. Ecchia, Giulio & Mariotti, Marco, 1998. "Coalition formation in international environmental agreements and the role of institutions," European Economic Review, Elsevier, vol. 42(3-5), pages 573-582, May.
    8. van Aarle, Bas & Lans Bovenberg, A. & Raith, Matthias G., 1997. "Is there a tragedy of a common central bank? A dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 417-447.
    9. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October.
    10. Ben-Porath, Elchanan, 1998. "Correlation without Mediation: Expanding the Set of Equilibrium Outcomes by "Cheap" Pre-play Procedures," Journal of Economic Theory, Elsevier, vol. 80(1), pages 108-122, May.
    11. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329.
    12. 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.
    13. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.
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    More about this item

    Keywords

    monetary and fiscal policies; differential games; correlated equilibrium.;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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