Game of Thrones: Accommodating Monetary Policies in a Monetary Union

In this paper we present an application of the dynamic tracking games framework to 1 a monetary union. We use a small stylized nonlinear three-country macroeconomic model of a 2 monetary union to analyse the interactions between fiscal (governments) and monetary (common 3 central bank) policy makers, assuming different objective functions of these decision makers. Using 4 the OPTGAME algorithm we calculate solutions for several games: a noncooperative solution 5 where each government and the central bank play against each other (a feedback Nash equilibrium 6 solution), a fully cooperative solution with all players following a joint course of action (a Pareto 7 optimal solution), and three solutions where various coalitions (subsets of the players) play against 8 coalitions of the other players in a noncooperative way. It turns out that the fully cooperative 9 solution yields the best results, the noncooperative solution fares worst, and the coalition games 10 lie in between, with a broad coalition of the fiscally more responsible countries and the central bank 11 against the less thrifty country coming closest to the Pareto optimum. 12