Dynamic games of fiscal and monetary policies for Austria

This paper considers a dynamic game between fiscal policy (the government) and monetary policy (the central bank). Both policy-makers are assumed to optimize quadratic inter-temporal objective functions; they attach different weights to the targets employment and price stability. An econometric model of the Austrian economy is the dynamic system upon which fiscal and monetary policies act. Numerical time paths of control and endogenous variables are calculated for non-cooperative (open-loop and feedback Nash and Stackelberg equilibria) and cooperative solutions. It is shown that the outcomes of these solutions entail more countercyclical policies than a projection of the model. There are only small differences between the results of the solution concepts considered. The position of the government is stronger than that of the central bank as regards their influence on macroeconomic target variables.