A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations

By Neck, Reinhard; Behrens, Doris A. | Atlantic Economic Journal, December 2009 | Go to article overview

A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations


Neck, Reinhard, Behrens, Doris A., Atlantic Economic Journal


Introduction

In the theory of quantitative economic policy, dynamic macroeconomic policy-making has usually been regarded as an optimum control problem with respect to a single, national, policy-maker's objective function. During the last few decades, however, it has been increasingly recognized that the interaction of several decision-makers with conflicting objectives constitutes an essential element of a policy-making process. In particular, different policy-making institutions which are responsible for specific policy instruments and/or areas may differ with respect to their preferences. For example, central banks are often highly adverse to inflation, while governments frequently put more emphasis on goals like full employment or high GDP growth. Another possible conflict may arise among policy-makers of different countries, who primarily pursue their own national interests and do not care about spillovers of their actions to other countries or even engage in beggar-thy-neighbor policies. Moreover, there may be a conflict of interest between the decisions of a country's policy-makers and the preferences of the majority of its citizens. For modeling these and similar potential conflicts, dynamic game theory has proven itself a valuable analytical tool, and several macroeconomic policy applications of this theory can be found in the literature (see, e.g., Petit 1990; Dockner et al. 2000).

Dynamic game models are usually more complex than optimal control problems. Only in rare cases are analytical solutions available for these models (see, e.g., Basar and Olsder 1999). Therefore, even for small macroeconomic models, numerical solutions or approximations to them are the best one can hope for. In this paper, we use the OPTGAME algorithm (Behrens and Neck 2006) to analyze a macroeconomic policy problem for a two-country monetary union. The OPTGAME algorithm is designed to approximate solutions to dynamic games with a finite planning horizon. It solves discrete-time LQ (linear-quadratic) games, and approximates the solutions of nonlinear-quadratic difference games by iteration. At present, the algorithm calculates the open-loop and the feedback Nash equilibrium solution and the cooperative Pareto-optimal solutions for an arbitrary number of players; extensions to other solution concepts are being implemented.

In this paper, we consider the design of stabilization policies for a small macroeconomic model of a monetary union consisting of two countries. In a monetary union, national currencies, national central banks, are completely replaced by a common currency, common central bank. Here, we consider the simple case of a monetary union consisting of two symmetric countries--countries of identical size with identical model parameters. The purpose of this study is not to provide a model for an actual monetary union, such as the European Economic and Monetary Union. Instead, we want to explore the most essential features of policy design in a monetary union model deliberately kept as simple as possible. We intend to show how the results of different solution concepts for a dynamic game between the common central bank and national fiscal policy-makers can provide insights into the structure of a policy conflict and its consequences under different assumptions about policy-makers' behavior in such a union. Although no immediate policy implications for actual monetary unions can be derived from these results, they provide a starting point for a systematic exploration of policy conflicts in more elaborate models.

Conflicts between monetary and fiscal policies were analyzed previously by several authors using dynamic game theory (e.g. Hughes Hallett and Petit 1990). There is also a large literature in international economics about dynamic conflicts between policy-makers of different countries (e.g. Miller and Salmon 1985). In a monetary union, both types of conflict are present because a supra-national central bank interacts strategically with national fiscal policy-makers of two or more countries. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

A Macroeconomic Policy Game for a Monetary Union with Adaptive Expectations
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.