A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations |
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Authors: | Reinhard Neck Doris A Behrens |
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Institution: | 1. Department of Economics, University of Klagenfurt, Universitaetsstrasse 65-67, 9020, Klagenfurt, Austria
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Abstract: | We consider a dynamic game model of a two-country monetary union. Governments (fiscal policies) pursue national goals while the common central bank’s monetary policy aims at union-wide objectives. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank. We consider conflicting (non-cooperative Nash equilibrium) and coordinated policy-making (cooperative Pareto solutions). We show that there is a trade-off between the deviations of instruments and targets from desired paths; the volatility of output and inflation increases when private agents react more strongly to changes in actual inflation. |
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