Strategic monetary and fiscal policy interactions: an empirical investigation

Abstract

This paper identifies leadership regimes in monetary-fiscal policy interactions in three countries, the UK, the US and Sweden. We specify a small-scale, structural general equilibrium model of an open economy and estimate it using Bayesian methods. We assume that the authorities can act strategically in a non-cooperative policy game, and compare different leadership regimes. We find that the model of fiscal leadership gives the best fit for the UK and Sweden, while in the US the Nash or non-strategic regime dominates. We assess the extent to which policy maker preferences reflect microfounded social preferences.