What Happens when Inflation Targets Change?

This paper considers an open-loop Nash game between independent monetary and fiscal authorities which seek to achieve conflicting objectives. The monetary authority is concerned solely with achieving a desired rate of inflation. The fiscal authority has multiple objectives defined by specific preference parameters. Using a calibrated model, a dynamic game theory approach is employed to analyze the impact of a change in inflation targets on the dynamic paths of public debt, the real money supply, government expenditure, and real interest rates.