On the role of information in decentralized macro-economic stabilization†

Abstract

This paper deals with the so-called timing problem in macro-economic stabilization. A simple linear model of the U.S. economy is considered and the decision-making is assumed to be decentralized with the two independent control agents being the monetary and the fiscal authorities. The timing problem is due to the fact that the Central Bank is able to update the monetary policy decisions rapidly, whereas the fiscal policy decisions, which are made by Congress, are inflexible and cannot usually be re-evaluated with respect to the value of the system state at short time intervals. A general analysis of the effects of timing differences is performed. The problem formulation results in non-zero-sum difference games with periodic open-closed information structures. The Nash equilibrium solution concept is assumed. The results suggest that the fiscal losses are relatively insensitive the changes in the policy updating intervals when the fiscal agent is assigned to stabilize deviations in the domestic production. A completely opposite behaviour is observed when the assignments to targets are interchanged.

Notes

†This work has been supported by the Academy of Finland, The Walter Ahlstrom Foundation, and The Paulo Foundation.