A differential game analysis of fiscal policy coordination within a monetary union.

Rossiter, Anthony Paul. (2003). A differential game analysis of fiscal policy coordination within a monetary union. Honours Thesis, School of Economics, The University of Queensland.

       
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Author Rossiter, Anthony Paul.
Thesis Title A differential game analysis of fiscal policy coordination within a monetary union.
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2003
Thesis type Honours Thesis
Total pages 119
Language eng
Subjects 14 Economics
Formatted abstract This paper extends the differential game analysis of Engwerda et al (2002) on the interaction between fiscal stabilisation policies in a two-country monetary union. The algebraic Riccati equation approach discussed in Engwerda et al (1999) is employed to consider the effect on the behaviour of authorities in the union when there are country and/or union risk premia that depend on the fiscal position of both countries in the monetary union. These effects are discussed in the context of a monetary authority adopting a fixed rate and a Taylor rule, respectively, for its monetary policy. Noncooperative open-loop Nash equilibria and Pareto equilibria are computed numerically for these cases and their adjustment dynamics compared. It is found that the presence of union risk premia can induce behaviour under noncooperation similar to the behaviour under cooperation, while country risk premia lead to an increase in welfare losses under both cooperation and noncooperation. It is also shown that the main impact of a monetary authority adopting a Taylor rule in a game where asymmetry is present is the transfer of welfare losses between the two authorities. The number of open-loop Nash equilibria admitted by the game is also examined through numerical simulations.

 
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