Leith and Wren-Lewis (2007) have shown that government debt is returned to its pre-shock level in a New Keynesian model under optimal discretionary policy. This has two important implications for monetary and fiscal policy. First, in a high-debt economy, it may be optimal for discretionary...

This paper studies the implications of adaptive learning in the modelling of international linkages in a two-region MSG-Cubed (MSG3) model built on micro-founded behaviours of firms and households. The nature of the transmission process under rational expectations versus the adaptive learning...

The paper considers a simple model in which monetary and fi?scal policies are formally independent, but still interdependent - through their spillovers onto the macroeconomic targets to which they are not primarilly assigned. It shows that the average equilibrium levels of inflation, deficit,...

The paper attempts to assess to what extent the central bank or the government should respond to developments that cause ?financial instability, such as housing or asset bubbles, overextended fi?scal policies, or excessive public or household debt. To analyze this question we set up a simple...

The paper examines whether central banks should be committed to achieving price stability (a low-inflation target), and how strong (explicit) their long-term monetary commitment should be. For that purpose we propose a game theoretic framework that enables us to model various degrees of...

This paper proposes a decision theoretic method to choose a single reserve price for partially identified auction models, such as Haile and Tamer, 2003, using data on transaction prices from English auctions. The paper employs Gilboa and Schmeidler, 1989 for inference that is robust with respect...

This paper shows an avenue through which a numerical inflation target ensures low inflation and high credibility: one that is independent of the usual Walsh incentive contract. Our novel game theoretic framework - a generalization of alternating move games - formalizes the fact that since the...

Empirical literature provided convincing evidence that explicit (ie legislated) inflation targets anchor expectations. We propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework we identify several...

This paper proposes a simple framework that generalizes the timing structure of macroeconomic (as well as other) games. Building on alternative move games and models of "rational inattention" the players' actions may be rigid, ie optimally chosen to be infrequent. This rigidity makes the game...

Opponents of inflation targeting have argued that a commitment to a numerical inflation target reduces policy's stabilization flexibility - increasing output volatility under supply shocks. Using a novel game theoretic approach our paper demonstrates that this claim may fail to account for the...