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Government and Central Bank Interaction under uncertainty : A Differential Games Approach

Author

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  • Engwerda, Jacob

    (Tilburg University, Center For Economic Research)

  • Mahmoudinia, D.

    (Tilburg University, Center For Economic Research)

  • Isfahani, Rahim Dalali

Abstract

Today, debt stabilization in an uncertain environment is an important issue. In particular, the question how fiscal and monetary authorities should deal with this uncertainty is of much importance. Especially for some developing countries such as Iran, in which on average 60 percent of government revenues comes from oil, and consequently uncertainty about oil prices has a large effect on budget planning, this is a significant question. For this reason, we extend in this paper the wellknown debt stabilization game introduced by Tabellini (1986). We incorporate deterministic noise into that framework. Also we solve this extended game under a Non-cooperative, Cooperative and Stackelberg setting assuming a feedback information structure. The main result shows that under all three regimes, more active policies are used to track debt to its equilibrium level and the smaller this equilibrium level becomes, the more fiscal and monetary authorities are concerned about noise. Furthermore, the best-response policy configuration if policymakers are confronted with uncertainty seems to depend on the level of anticipated uncertainty.
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Suggested Citation

  • Engwerda, Jacob & Mahmoudinia, D. & Isfahani, Rahim Dalali, 2016. "Government and Central Bank Interaction under uncertainty : A Differential Games Approach," Discussion Paper 2016-012, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:8da07e25-a1e7-4d91-8829-1a152aa1d5f9
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Giovanni Di Bartolomeo & Marco Di Pietro & Enrico Saltari & Willi Semmler, 2018. "Public debt stabilization: the relevance of policymakers’ time horizons," Public Choice, Springer, vol. 177(3), pages 287-299, December.
    3. Engwerda, Jacob & van Aarle, Bas & Anevlavis, Tzanis, 2019. "Debt stabilization games in a monetary union: What are the effects of introducing eurobonds?," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 78-102.
    4. Nikooeinejad, Z. & Heydari, M. & Loghmani, G.B., 2022. "A numerical iterative method for solving two-point BVPs in infinite-horizon nonzero-sum differential games: Economic applications," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 200(C), pages 404-427.

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    More about this item

    Keywords

    fiscal and monetary policy interaction; differential game; dynamic system; uncertainty;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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