Finance and Economics Discussion Series (FEDS)
Macroeconomic Policy Games
Martin Bodenstein, Luca Guerrieri, and Joe LaBriola
Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and extends these results by highlighting their sensitivity to the choice of policy instrument. For the second example, a central bank and a macroprudential regulator are assigned distinct objectives in a model with financial frictions. Lack of coordination leads to large welfare losses even if technology shocks are the only source of fluctuations.
Keywords: Optimal policy, strategic interaction, welfare analysis, monetary policy cooperation, marcroprudential regulation
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