Dmitri Blueschke

Macroeconomic Policies for Slovenia after the “Great Recession”

The paper analyses the effects of different global developments and the resulting reactions of fiscal policies after the “Great Recession” on the Slovenian economy. We use the macro model SLOPOL8.1, an econometric model of the Slovenian economy, to simulate the effects of different scenarios for the global economy under the assumption of “no-policy” reactions, i.e. assuming that macroeconomic policies are conducted without attempting to deal with the effects of the world economy. Moreover, we investigate how fiscal policy should react under each scenario if it aims at minimizing some intertemporal objective function containing important macroeconomic policy targets as arguments. It turns out that the development of the Slovenian economy depends strongly on world business cycles. If another crisis follows the “Great Recession”, a highly expansionary design of fiscal policies is required in order to achieve reasonable rates of growth or levels of output, which is neither realistic nor sustainable. There are strong trade-offs between countercyclical fiscal policies and the requirements of fiscal solvency. Although acceptable fiscal policies have to be mildly countercyclical, they are not able to protect the Slovenian economy from the negative effects of another slump such as the one occurring during the “Great Recession”.

OPTGAME3: A Dynamic Game Solver and an Economic Example

In this paper we present the OPTGAME3 algorithm, which can be used to calculate equilibrium and optimum control solutions of dynamic games. The algorithm was programmed in C# and MATLAB and allows the calculation of approximate cooperative Pareto-optimal solutions and non-cooperative Nash and Stackelberg equilibrium solutions. In addition we present an application of the OPTGAME3 algorithm where we use a small stylized nonlinear two-country macroeconomic model of a monetary union for analysing the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Several dynamic game experiments are run for different information patterns and solution concepts. We show how the policy makers react optimally to demand and supply shocks. Some comments are given about possible applications to the recent sovereign debt crisis in Europe.

Policy Interactions in a Monetary Union: An Application of the OPTGAME Algorithm

In this chapter we present an application of the dynamic tracking games framework to a monetary union. We use a small stylized nonlinear two-country macroeconomic model (MUMOD1) of a monetary union to analyse the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm we calculate equilibrium solutions for four game strategies: one cooperative (Pareto optimal) and three non-cooperative games: the Nash game for the open-loop information pattern, the Nash game for the feedback information pattern, and the Stackelberg game for the feedback information pattern. Applying the OPTGAME algorithm to the MUMOD1 model we show how the policy makers react to demand and supply shocks according to different solution concepts. Some comments are given on possible applications to the recent sovereign debt crisis in Europe.

No such thing as a perfect hammer: comparing different objective function specifications for optimal control

Linear-quadratic (LQ) optimization is a fairly standard technique in the optimal control framework. LQ is very well researched, and there are many extensions for more sophisticated scenarios like nonlinear models. Conventionally, the quadratic objective function is taken as a prerequisite for calculating derivative-based solutions of optimal control problems. However, it is not clear whether this framework is as universal as it is considered to be. In particular, we address the question whether the objective function specification and the corresponding penalties applied are well suited in case of a large exogenous shock an economy can experience because of, e.g., the European debt crisis. While one can still efficiently minimize quadratic deviations around policy targets, the economy itself has to go through a period of turbulence with economic indicators, such as unemployment, inflation or public debt, changing considerably over time. We test four alternative designs of the objective function: a least median of squares based approach, absolute deviations, cubic and quartic objective functions. The analysis is performed based on a small-scale model of the Austrian economy and illustrates a certain trade-off between quickly finding an optimal solution using the LQ technique (reaching defined policy targets) and accounting for alternative objectives, such as limiting volatility in economic performance. As an implication, we argue in favor of the considerably more flexible optimization technique based on heuristic methods (such as Differential Evolution), which allows one to minimize various loss function specifications, but also takes additional constraints into account.

How Should Slovenia Design Fiscal Policies in the Government Debt Crisis

ABSTRACT We investigate how fiscal policies should be designed in Slovenia during the next few years. Using the SLOPOL model, an econometric model of the Slovenian economy, we analyze the effects of different fiscal policies using simulations and determine optimal fiscal policies for Slovenia. We show that the optimal design of fiscal policies is rather close to the austerity course as detailed in the Slovenian Stability Program, revealing the small scope of possible alternative fiscal stabilization policies available due to the relatively low effectiveness of the fiscal instruments with respect to their influence on the business cycle in the Slovenian economy.

Slow and Steady Wins the Race: Approximating Nash Equilibria in Nonlinear Quadratic Tracking Games Steter Tropfen höhlt den Stein: Approximation von Nash Gleichgewichten in Nicht-linearen Dynamischen Spielen

Abstract We propose a new method for solving nonlinear dynamic tracking games using a meta-heuristic approach. In contrast to ‘traditional’ methods based on linear-quadratic (LQ) techniques, this derivative-free method is very flexible with regard to the objective function specification. The proposed method is applied to a three-player dynamic game and tested versus a derivative-dependent method in approximating solutions of different game specifications. In particular, we consider a dynamic game between fiscal (played by national governments) and monetary policy (played by a central bank) in a monetary union. Apart from replicating results of the LQ-based techniques in a standard setting, we solve two ‘non-standard’ extensions of this game (dealing with an inequality constraint in a control variable and introducing asymmetry in penalties of the objective function), identifying both a cooperative Pareto and a non-cooperative open-loop Nash equilibria, where the traditional methods are not applicable. We, thus, demonstrate that the proposed method allows one to study more realistic problems and gain better insights for economic policy.

Game of Thrones: Accommodating Monetary Policies in a Monetary Union

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

Finite horizon optimum control with and without a scrap value

In this paper, we study the effects of scrap values on the solutions of optimal control problems with finite time horizon. We show how to include a scrap value, either for the state variables or for the state and the control variables, in the OPTCON2 algorithm for the optimal control of dynamic economic systems. We ask whether the introduction of a scrap value can serve as a substitute for an infinite horizon in economic policy optimization problems where the latter option is not available. Using a simple numerical macroeconomic model, we demonstrate that the introduction of a scrap value cannot induce control policies which can be expected for problems with an infinite time horizon.

Strategic Macroeconomic Policies in a Monetary Union

In this paper we present an application of the dynamic tracking games framework to a monetary union. We use a small stylized nonlinear two-country macroeconomic model of a monetary union for analyzing the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm we calculate solutions for two game strategies: one cooperative (Pareto optimal) and one non-cooperative game type (the Nash game for the feedback information pattern). Applying the OPTGAME algorithm to the MUMOD1 model we show how the policy makers react to demand shocks according to these solution concepts. To this end we introduce two sequences of different demand side shocks on the monetary union. The first sequence includes a negative asymmetric demand side shock aimed at describing the dynamics in a monetary union in a situation similar to the economic crisis (2007–2010) and the sovereign debt crisis (since 2010) in Europe. The second sequence of shocks includes different kinds of demand side shocks and serves to discuss the best macroeconomic policy strategies for possible future scenarios.

Fiscal and Monetary Policies in a Monetary Union: Conflict or Cooperation?

In this paper we present an application of the dynamic tracking games framework to a monetary union. We use a small stylized nonlinear two-country macroeconomic model (MUMOD1) of a monetary union to analyse the interactions between fiscal (governments) and monetary (common central bank) policy makers, assuming different objective functions of these decision makers. Using the OPTGAME algorithm we calculate solutions for two game strategies: a cooperative solution (Pareto optimal) and a non-cooperative equilibrium solution (the Nash game for the feedback information pattern). We show how the policy makers react to demand shocks under non-cooperation and cooperation scenarios. The cooperative solution dominates the non-cooperative solution in all scenarios, which may be interpreted as an argument for coordinating fiscal and monetary policies in a monetary union in a situation of high public debt such as in the recent sovereign debt crisis in Europe.