In this paper, we present an application of the dynamic tracking games framework to a\nmonetary union. We use a small stylized nonlinear three-country macroeconomic model of a monetary\nunion to analyze the interactions between fiscal (governments) and monetary (common central\nbank) policy makers, assuming different objective functions of these decision makers. Using the\nOPTGAME algorithm, we calculate solutions for several games: a noncooperative solution where each\ngovernment and the central bank play against each other (a feedback Nash equilibrium solution),\na fully-cooperative solution with all players following a joint course of action (a Pareto optimal\nsolution) and three solutions where various coalitions (subsets of the players) play against coalitions\nof the other players in a noncooperative way. It turns out that the fully-cooperative solution yields the\nbest results, the noncooperative solution fares worst and the coalition games lie in between, with a\nbroad coalition of the fiscally more responsible countries and the central bank against the less thrifty\ncountries coming closest to the Pareto optimum.
Loading....