Unilateral Support Equilibria in a Mixed Game among Monetary, Fiscal, and Speculator Policymakers within the Framework of the Modified Logistic Function in Strategic Form

Document Type : Research Paper

Authors

1 Economic Department, Vali-e-Asr University of Rafsanjan, Rafsanjan Iran

2 Department of Mathematics, Vali-e-Asr University of Rafsanjan, Rafsanjan Iran

Abstract

One of the topics that have attracted researchers' attention in recent decades is the analysis of the strategic interaction between fiscal and monetary authorities, with emphasis on the role of a third actor—foreign exchange market interventionists—in achieving stability in key economic indicators, particularly in the foreign exchange market. The purpose of this study is to design a model based on game theory involving three economic actors. In this paper, we aim to minimize the influence of the speculator on the economy. The government aims to achieve maximum economic growth by implementing financial policies. Meanwhile, the central bank focuses on maintaining price stability through its monetary policies. Additionally, speculators look to generate the highest profits by actively intervening in the currency market. To achieve this, we will analyze the Nash equilibrium and the unilateral support equilibria in the game using a modified logistic function. In the Nash equilibrium, each player individually tries to maximize their own benefit. In contrast, in unilateral support equilibria, each player seeks to maximize their own profit (or minimize their own loss) while supporting the player they are backing. The design of this game has been analyzed in six scenarios. The results of this game-theoretic analysis reveal that, among the six designed scenarios, the first and fifth scenarios—specifically, the main game and the scenario where the government and central bank mutually support each other—exhibit the lowest possible level of involvement by currency market speculators. In these cases, unilateral support equilibria emerge, wherein both the government and the central bank adopt contractionary fiscal and monetary policy strategies to minimize their respective losses

Keywords

Main Subjects

References

  1. Afonso, A., Alves, J., & Balhote, R. (2019). Interactions between monetary and fiscal policies. Journal of Applied Economics, 22(1), 132–151.
  2. Algieri, B. (2016). Conditional price volatility, speculation, and excessive speculation in commodity markets: sheep or shepherd behaviour?. International Review of Applied Economics, 30(2), 210-237.
  3. Arora, S. (2018). Monetary versus fiscal policy in India: a SVAR analysis, Macroeconomics and Finance in Emerging Market Economies, 11(2), 250-274.
  4. Ashena, M., & Lale Khezri, H. (2023). The Relationship between Uncertainty of Money Market and Exchange Rate Market with Economic Instability in Iran. Applied Theories of Economics. 10 (3), 173-200 (In Persian).
  5. Berge, C. (1957). Théorie Générale des Jeux à n-Personnes [General Theory of n-person Games]. Paris: Gauthier Villars.
  6. Cao, J., & Illing. G. (2019). Interaction between monetary and fiscal policy: Active and passive monetary regimes. Money: Theory and Practice Springer, 93–117.
  7. Carfì, D., & Musolino, F. (2012). Game theory and speculation on government bonds. Economic Modelling, 29 (6), 2417–2426.
  8. Colman, A. M., Korner, T.W., Musy, O., & Tazda, T. (2011). Mutual support in games: some properties of Berge equilibria. Journal of Mathematical Psychology, 55(2), 166–175.
  9. Crettez, B. & Nessah, R. (2020). On the existence of unilateral support equilibrium. Mathematical Social Sciences, 105, 41–47.
  10. Crettez, B. (2019). Unilateral Support Equilibrium, Berge Equilibrium, and Team Problems Solutions. Journal of Quantitative Economics, 17, 727-739.
  11. Demid, E. (2018). Fiscal and Monetary Policy: Coordination or Conflict?. International Economic Journal, 32(4), 547-571.
  12. Dixit, A., Skeath, S., & Reiley, D. (2015). Games of strategy. Fourth edition.
  13. Erfani, A., Talebbeydokhti, A., & Shahbazi, B. (2022). Strategic confrontation within monetary and financial authorities, and foreign exchange market participants in Iran: non-cooperative static games approach. Quarterly Journal of Economic Research and Policies, 30(102), 217-253 (In Persian).
  14. Foroutannia, D., & Mahmoudinia, ‎ (2024). Equitable Equilibrium in Strategic Coalitional Semi-Cooperative Games‎. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4893855
  15. Foroutannia, D., Mahmoudinia, D. (2024). Coalition or non-coalition: Greedy scalar equilibrium in the semi-cooperative game with the role of speculators in the game between fiscal and monetary policy-makers. Quarterly Journal of Economics Modeling, 3(18), 53-86 (In Persian).
  16. Gholizadeh, A., Manochehri, S., & Fatemi Zardan, Y. (2022). Modeling of Speculation in the Housing Market of Tehran. Journal of Economics and Modelling. 12(4), 137-179 (In Persian).
  17. Hosseini, E., Nademi, Y., Asayesh, H., Sajadifar, S. H. (2021). An Investigation of the Interaction Effects of Volatility of Monetary, Financial and Real Exchange Rate Policies in the Iranian Economy: Application of VAR and GARCH Models. The Journal of Economic Studies and Policies, 7(2), 133-164 (In Persian).
  18. Jafarzadeh Gollo, S., Abbasinejhad, H., Rahmani, T., & Barkhordari. (2023). Consequences of the policymaker's reaction to speculative attacks in the foreign exchange market: The role of the quality of political institutions. Financial Economics, 61(16), 103-128 (In Persian).
  19. Juhro, S. M., Narayan, P. K., & Iyke, N. B. (2022). Understanding monetary and fiscal policy rule interactions in Indonesia, Applied Economics, 54(45), 5190-5208.
  20. Kaminsky, G., Reinhart, C., & Vegh, C. A. (2004). When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, 19, 16–41
  21. Mahmoudinia, D., Abdolahi Nasab, F. (2024). The Impact of Central Bank Independence and Preferences on Inflation Targeting in Rule-Based and Discretionary Monetary Policy Approaches. Applied Theories of Economics. 10 (4), 235-276 (In Persian).
  22. Mahmoudinia, D., Jafari, S., & Foroutannia, D. (2024). Game Theory and the Self-Interested Nash Equilibrium against the Altruistic Berge Equilibrium in the Framework of the Ethical Perspective. Journal of Economic Essays: An Islamic Approach (JEE), 21(43), 25-48 (In Persian).
  23. Mansourin, N., Mosavi jahromy, Y., Abolhasani, A., & Shayegani, B. (2017). Analyzing the Relationship among Government, Central Bank and Speculators in Iran: Approach of Game Theory and Nash Equilibrium. Journal of Economics and Modelling, 7(28), 139-167 (In Persian).
  24. Marschak, J. (1955). Elements for a theory of teams. Management Science, 1 (2), 127–137.
  25. Nash, J. F. (1951). Noncooperative games. Annals of Mathematics, 54,289-295.
  26. Paesani, P., & Rosselli, A. (2020). How speculation became respectable: early theories on financial and commodity markets. The European Journal of the History of Economic Thought, 28(2), 273-291.
  27. Safatly, E., & Abdou, J. (2021). A new tensor approach of computing pure and mixed unilateral support equilibria. RAIRO-Oper. Res, 55 (2), 395-413.
  28. Salukvadze, M. E., & Zhukovskiy, V. I. (2020). The Berge Equilibrium: A Game-Theoretic Framework for the Golden Rule of Ethics.
  29. Samson Omotosho, B. (2024). Monetary and fiscal policy interactions in resource-rich emerging economies, Macroeconomics and Finance in Emerging Market Economies, 17(2), 249-270, DOI: 10.1080/17520843.2022.2042974
  30. Sargent T., & Wallace N. (1981). Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis Quarterly Review, 5, 1-17
  31. Scalzo, V. (2023). Existence and stability results on the unilateral support equilibrium. Mathematical Social Sciences, 123, 1-9.
  32. Schouten, J., Borm, P.E.M., & Hendrickx, R.L.P. (2019). Unilateral support equilibria. Journal of Mathematical Psychology, 93,102295.
  33. Stawska, J., Malaczewski, M., Malaczewska, P., & Stawasz-Grabowska, E. (2023). The central bank or the government – who really dictates the terms of the policy-mix cooperation in economies with an independent monetary policy?, Economic Research-Ekonomska Istraživanja, 36(2), 2142258.
  34. Walsh, C. E. (2003). Monetary theory and policy. Cambridge: MIT Press
  35. Woroniecka-Leciejewicz, I. (2010). Decision interactions of the monetary and fiscal authorities in the choice of policy mix. Journal of Organisational Transformation & Social Change, 7(2), 189-210.
  36. Woroniecka-Leciejewicz, I. (2015). Equilibrium strategies in a fiscal-monetary game: a simulation analysis. Operation research and decision.

Files

Share

How to cite

Statistics