Monetary and Fiscal Policy Interaction and Government Debt Stabilization

Abstract

Employing differential games, this paper models the strategic interaction between monetary authorities who control monetization and fiscal authorities who control primary fiscal deficits. We analytically compute and interpret the cooperative and noncooperative Nash open-loop equilibria. Furthermore, we reinterpret unpleasant monetarist arithmetic and analyze the impact of a more conservative central bank. Finally, to explore the consequences of a more independent central bank, we analyze Stackelberg open-loop equilibria.