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DYNAMIC CONTROLLABILITY WITH OVERLAPPING TARGETS: OR WHY TARGET INDEPENDENCE MAY NOT BE GOOD FOR YOU

Published online by Cambridge University Press:  19 March 2007

NICOLA ACOCELLA ,
GIOVANNI DI BARTOLOMEO  and
ANDREW HUGHES HALLETT
NICOLA ACOCELLA
Affiliation:
University of Rome La Sapienza
GIOVANNI DI BARTOLOMEO
Affiliation:
University of Rome La Sapienza and University of Teramo
ANDREW HUGHES HALLETT
Affiliation:
Vanderbilt University and CEPR
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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, static or dynamic, 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 in which there are also nondynamic 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 their nondynamic 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 with the possibility of target independence.

Keywords

Policy GamesPolicy IneffectivenessStatic ControllabilityExistence of EquilibriaNash Feedback Equilibrium
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 2 , April 2007 , pp. 202 - 213
Copyright
© 2007 Cambridge University Press

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