Strategic Interaction in Macroeconomic Policies: An Outline of a New Differential Game Approach

Increasing globalization has created a realization by most countries that macroeconomic policy coordination is useful. However, the economic models advanced so far for this purpose do not adequately address the major questions that are of interest for policy coordination. The need for policy coordination arises from differences in resource endowments and differences in savings and investment that have implications for long run growth. The models that are currently in use are only of a comparative static nature based on open IS-LM framework with dynamics brought in as disequilibrium dynamics. It is suggested here that dynamic multi-sectoral multi-regional input output model with current input and capital input matrices may be used along with compatible spatial price equilibrium relationships and error correcting disequilibrium dynamics as the model. Some suggestions are offered to weaken the sufficiency conditions for the existence of a solution to Linear Quadratic Differential Game and some economic examples are discussed.