Extraction of Optimal Fiscal and Monetary Policy Rules in Framework of Game Theory: Application of Dynamic Stochastic General Equilibrium Model

Document Type : Research Paper

Authors

1 Assistant Professor of Economics, Vali-E-Asr University of Rafsanjan

2 Associate Professor of Economics, University of Isfahan

3 Ph.D. Student in Economics, University of Allameh Tabatabai

Abstract

In the recent decades, implementation of fiscal and monetary policies between the government and the central bank has been one of the interesting topics among economists. Many researchers believe that implementation of fiscal and monetary policies based on the rule and commitment can smooth the access path to a sustainable level of economic variables. Also, different methods have been studied by researcher for this subject. Game theory and Dynamic Stochastic General Equilibrium (DSGE) models are two instruments and methods for considering this issue. Hence, in this current study in framework of Game theory and DSGE Models, optimal rule for monetary and fiscal policy-maker in Iran economy are obtained. The result of this study shows that the value of social welfare is more, when government and central bank behave in framework of cooperative than non-cooperative. On the other hand, in cooperative than non-cooperative case, a larger share of oil revenues as foreign reserves is kept at the central bank.

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