A Welfare Analysis of Interactions between Government and Central Bank: The Policy Games Approach

Document Type : Original Article


1 Ph.D. Candidate in Economics, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran

2 Associate Professor of Economics, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran

3 Assistant Professor of Economics, Faculty of Administrative Sciences and Economics, Ferdowsi University, Mashhad, Iran


Coordination between monetary and financial policies is essential due to the feedback effects of the policies as well as intertemporal decision-makings; As policies enforced by an institution may affect policies adopted by another entity in a destructive manner, the welfare of the society may be reduced ultimately. Therefore, to achieve the desired economic goals, appropriate institutional arrangements, and mechanism for the adequate coordination between the policy makers is required. In this study, after modeling the structural equations of the Iranian economy, the optimal rule for the monetary and fiscal policymakers, in form of the different policy games, was extracted. then, the basic equations were estimated using the data of 2005-2016 period, and their parameters were used in games simulation (in three situations: normal game, Stackelberg leadership game, as well as cooperative game). The games were simulated, and the value of the minimum losses incurred for each player and community was calculated. Comparison and analysis of the results show that the best welfare is created by the cooperation of both monetary and financial institutions. But if it is not possible to establish a coordinating institution between the two, central bank leadership is suggested as the best interaction.


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