Conclusions of cooperative and noncooperative interaction between monetary and fiscal policies in small scale open economy

Abstract

Interactions between the monetary and fiscal policy are analyzed in a game-theoretical framework on the base of the new-Keynesian model. The interactions between policymakers are modeled by using a dynamic stochastic equilibrium model (DSGE) for a small-scale open economy. From this point of view, the interactions between policymakers are evaluated in two different hypothetical scenarios. Optimal policy rules for a small-scale open economy are derived by using Nash Solution (a non-cooperative solution) and cooperative equilibrium. The performances of the derived policy rules are evaluated by comparing counter-factual experiments via dynamic simulation. The model parameters are calibrated for the Turkish economy. Then, the policy mix providing the minimum social loss is obtained. The main finding of dynamic simulations is that cooperative interaction shows better performance in the Turkish economy than non-cooperative interaction. © Peter Lang GmbH Internationaler Verlag der Wissenschaften Berlin 2020. All rights reserved.