Fiscal-monetary game analyzed with use of a dynamic macroeconomic model

Abstract

The paper deals with the fiscal-monetary game. In the game the fiscal and the monetary authorities take decisions on the choice of the optimum strategy from the point of view of realization of their respective economic objectives. A macroeconomic model has been constructed and used to represent the interrelations between, on the one hand, the instruments of fiscal policy and of the monetary policy, and, on the other hand – the economic effects resulting from their application. The best response strategies of the authorities and the Nash equilibrium state are analyzed. The simulation results obtained indicate that in a general case the Nash equilibrium is not Pareto optimal. It means that the policies should be coordinated and that respective negotiations leading to a Pareto-optimal consensus are needed.