The Government's Discount Rate: Choices and Consequences in a Dynamic Framework

This paper considers a closed macroeconomy where the monetary authority pursues an inflation target and policy outcomes are the consequences of a Nash game between fiscal and monetary authorities. The specification of the macroeconomic framework is characterized by nonlinearities which lead to multiple equilibria with differing stability properties. Employing a calibrated model and simulations derived using a Mathematica package, the stability properties of the economy and the likely choice of equilibrium are examined.