Macroeconomic Policy Games

58 Pages Posted: 16 Nov 2014

See all articles by Martin Bodenstein

Martin Bodenstein

Board of Governors of the Federal Reserve System

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Joe LaBriola

University of California, Berkeley

Date Written: September 23, 2014

Abstract

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

JEL Classification: E44, E61, F42

Suggested Citation

Bodenstein, Martin and Guerrieri, Luca and LaBriola, Joe, Macroeconomic Policy Games (September 23, 2014). FEDS Working Paper No. 2014-87. Available at SSRN: https://ssrn.com/abstract=2520201 or http://dx.doi.org/10.2139/ssrn.2520201

Martin Bodenstein

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Joe LaBriola

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

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