Government and central bank interaction under uncertainty

A differential games approach

Jacob Engwerda, D. Mahmoudinia, Rahim Dalali Isfahani

Research output: Contribution to journalArticleScientificpeer-review

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 well known 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.
Original languageEnglish
Pages (from-to)225-259
JournalIranian Economic Review
Volume20
Issue number2
Publication statusPublished - 2016

Fingerprint

Uncertainty
Central bank
Differential games
Government
Interaction
Debt
Fiscal
Authority
Stabilization
Stackelberg
Oil prices
Developing countries
Politicians
Best response
Government revenue
Iran
Information structure
Oil
Planning

Keywords

  • fiscal and monetary policy interaction
  • differential game
  • dynamic system
  • uncertainty

Cite this

Engwerda, J., Mahmoudinia, D., & Isfahani, R. D. (2016). Government and central bank interaction under uncertainty: A differential games approach. Iranian Economic Review, 20(2), 225-259.
Engwerda, Jacob ; Mahmoudinia, D. ; Isfahani, Rahim Dalali. / Government and central bank interaction under uncertainty : A differential games approach. In: Iranian Economic Review. 2016 ; Vol. 20, No. 2. pp. 225-259.
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Engwerda, J, Mahmoudinia, D & Isfahani, RD 2016, 'Government and central bank interaction under uncertainty: A differential games approach', Iranian Economic Review, vol. 20, no. 2, pp. 225-259.

Government and central bank interaction under uncertainty : A differential games approach. / Engwerda, Jacob; Mahmoudinia, D.; Isfahani, Rahim Dalali.

In: Iranian Economic Review, Vol. 20, No. 2, 2016, p. 225-259.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Government and central bank interaction under uncertainty

T2 - A differential games approach

AU - Engwerda, Jacob

AU - Mahmoudinia, D.

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AB - 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 well known debt stabilization game introduced by Tabellini (1986). Weincorporate deterministic noise into that framework. Also we solve thisextended 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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