Evaluation of catch-up paths by an uncertain dynamic game model

TL;DR

This paper develops a novel dynamic game model to analyze fiscal and monetary policy interactions under uncertainty, applied to evaluate development paths of catching-up economies like Hungary.

Contribution

It introduces a new discrete-time uncertain dynamic game framework with nonlinear expectations for policy interaction analysis.

Findings

Nine development paths evaluated for Hungary.

Model captures uncertainties in policy expectations.

Provides strategic insights into economic catch-up processes.

Abstract

To model the interaction of fiscal and monetary policy, a novel discrete-time, uncertain, infinite time horizon, dynamic game model is developed, where the uncertainties of expectations are modeled by unknown nonlinear but quadratically constrained deterministic functions. Cost-guaranteeing Nash strategies are defined for fiscal and monetary policy as two players. The model is suitable for comparative analysis of the development paths of catching-up economies. Specifically, we evaluate nine possible development paths for the Hungarian economy, where each path is characterised by a proxy for the debt-to-GDP ratio.