Strategic Macroeconomic Policy Interactions and the Optimal Design of Institutions

About the Project

This PhD project is based on the theory of economic policy in a strategic context research agenda, which analyses (macro-)economic policy with the use of game theory, hence becoming essentially a theory of conflict resolution, social compromise and designing relevant institutions (Acocella et al., 2013). Modern economies face various (e.g., demand; supply; credit) shocks in the short run, which impact on certain macroeconomic variables (e.g., output; unemployment; inflation; debt). Fiscal, monetary, and macro-prudential authorities have various instruments on their disposal that can be used to meet primary (and secondary) objectives, providing macroeconomic stabilisation and building up policy frameworks. In a world of many policymakers with many policy instruments and macroeconomic and social targets (e.g., inflation; unemployment; debt; income distribution; financial stability; climate change), actual outcomes result from the strategic interactions among those policymakers and with the private sector, where the role of institutions is crucial in determining policy outcomes. The existence of spillover effects and conflicting objectives may create coordination problems, but coordination may not be welfare-improving for any of the authorities involved; the sequence of moves in such policy games can deliver different policy outcomes; and optimal weights and targets of specific objectives can be considered. Furthermore, macroeconomic policies should be immune to the Lucas critique, hence micro-foundations and strategic interactions between the authorities and the private sector need to be considered, giving rise to widespread time-inconsistency issues in policymaking, under commitment (to rules) versus discretion (Walsh, 2017).

Specific examples of topics would be:

(i) strategic fiscal/monetary policy interactions;

(ii) strategic monetary/macroprudential policy interactions;

(iii) forward guidance and the role of expectations;

(iv) central bank independence and alternative (secondary) objectives;

(v) governments, central banks and climate change mitigation in a world at huge risk;

(vi) distributional effects of (interacting) monetary and fiscal policies;

(vii) strategic monetary/wage policy interactions – labour market institutions.

The analysis could be conducted in closed or (small) open economies, or in monetary unions.

Pre-requisites

A solid background from mathematics (and statistics) with knowledge in economics; a knowledge in a software programme / language like Matlab, R, Mathematica, EViews, Stata; and an understanding of modern monetary economics, following, e.g., Walsh (2017) and Gali (2015).

Eligibility requirements: MSc in Economics

References

Acocella, N., Di Bartolomeo, G. and Hughes Hallett, A. (2013). The Theory of Economic Policy in a Strategic Context. Cambridge University Press.
Gali, J. (2015). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications. Princeton University Press.
Walsh, C. E. (2017). Monetary Theory and Policy. The MIT Press.