Monetary and fiscal policy interaction and government debt stabilization

B. van Aarle, A.L. Bovenberg, M. Raith

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Abstract

In many developing and developed countries, government debt stabilization is an important policy issue. This paper models the strategic interaction between the monetary authorities who control monetization and the fiscal authorities who control primary fiscal deficits. Government debt dynamics are driven by the interest payments on outstanding debt and the part of the primary fiscal deficits that is not monetized. Modelling the interaction as a differential game, we compare the cooperative equilibrium and the non-cooperative Nash open-loop equilibrium. The well-known unpleasant monetarist arithmetic is reinterpreted in this differential game framework. We consider also the effects of making the Central Bank more independent.
Original languageEnglish
PublisherUnknown Publisher
Number of pages38
Volume1995-1
Publication statusPublished - 1995

Publication series

NameCentER Discussion Paper
Volume1995-1

Keywords

  • Game Theory
  • Central Banks
  • Monetary Policy
  • National Debt
  • Fiscal Policy
  • monetary economics

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    van Aarle, B., Bovenberg, A. L., & Raith, M. (1995). Monetary and fiscal policy interaction and government debt stabilization. (CentER Discussion Paper; Vol. 1995-1). Unknown Publisher.