Macroeconomic policies in a monetary union: a dynamic game

We develop a dynamic game model of a two-country monetary union to study strategic interactions between macroeconomic policy-makers facing adaptive inflationary expectations. In this union, governments of participating countries pursue national goals when deciding about fiscal policies, whereas the common central bank's monetary policy aims at union-wide objectives. For a symmetric demand shock, we derive numerical solutions of the dynamic game between the governments and the central bank, using the OPTGAME algorithm.