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Dynamic Controllability with Overlapping Targets: A Generalization of the Tinbergen-Nash Theory of Economic Policy

19 Pages Posted: 16 Nov 2005  

Giovanni Di Bartolomeo

Sapienza University of Rome, Department of Economics and Law

Nicola Acocella

Department of Methods and Models for Economics, Territory and Finance

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: October 2005

Abstract

We generalize some recent results developed in static policy games with multiple players, to a dynamic context. We find that the classical theory of economic policy can be usefully applied to a strategic context of difference games: if one player satisfies the Golden Rule, then either all other players' policies are ineffective with respect to the dynamic target variables shared with that player; or no Nash Feedback Equilibrium can exist, unless they all share target values for those variables. We extend those results to the case where there are also non-dynamic targets, to show that policy effectiveness (a Nash equilibrium) can continue to exist if some players satisfy the Golden Rule but target values differ between players in the non-dynamic targets. We demonstrate the practical importance of these results by showing how policy effectiveness (a policy equilibrium) can appear or disappear with small variations in the expectations process or policy rule in a widely used model of monetary policy.

Keywords: Policy games, Policy ineffectiveness, Static controllability, Existence of equilibria, Nash feedback equilibrium

JEL Classification: C72, E52, E61

Suggested Citation

Di Bartolomeo, Giovanni and Acocella, Nicola and Hughes, Andrew J., Dynamic Controllability with Overlapping Targets: A Generalization of the Tinbergen-Nash Theory of Economic Policy (October 2005). FEEM Working Paper No. 130.05. Available at SSRN: https://ssrn.com/abstract=847605 or http://dx.doi.org/10.2139/ssrn.847605

Giovanni Di Bartolomeo (Contact Author)

Sapienza University of Rome, Department of Economics and Law ( email )

via Castro del Laurenziano 9
Roma, 00191
Italy

Nicola Acocella

Department of Methods and Models for Economics, Territory and Finance ( email )

via del Castro Laurenziano, 9
Rome, RM 00161
Italy
+390649766359 (Phone)

HOME PAGE: http://www.memotef.uniroma1.it/newdip/utenti/acocellanicola/

Andrew J. Hughes Hallett

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 292 087 001 (Phone)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-322-8539 (Phone)
615-343-8495 (Fax)

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