A survey of dynamic game theory and an application in Turkey

Monetary and fiscal policies are crucial economic policy instrumentswhich influence the economic situation of a country. It is also of greatsignificance to evaluate these instruments taking into account theirinteraction and coordination. In this study, our aim is to evaluate themonetary and fiscal polices through dynamic game model according todemand-side Keynesian approach. In order to serve this purpose, throughforming a game model in which there are two players within a discrete timeinterval, the reciprocal relationships of Central Bank of the Republic ofTurkey, the money authority, and the Government, fiscal policy authority,between 1991 and 2007. In the model of the study, the objective function wasdefined in a structure of squared and dynamic system with a non-linearnature. Non-cooperative Nash equilibrium, Stackelberg equilibrium andcooperative Pareto optimal equilibrium were analyzed through GaussProgramming-based OPTGAME1.0 algorithm. Subsequently, the values ofequilibrium and optimal solution were interpreted in economic terms.Besides, through changing the weighted-coefficients related to the players inthe model, the sensitivity towards the change in the weighted-coefficient ofthe Pareto optimal solution was tested. The results suggest that equilibriumand optimal values related to the model formed do not have a significantdifference in different solution concepts and Pareto optimal solution is notsensitive to the changes in weighted-coefficient in Turkey data. It was foundout that algorithm of OPTGAME 1.0 employed for the solution of the gamewith two-player model is very sensitive to the changes in the time series.Keywords:1. Dynamic games2. Difference game model3. Monetary and Fiscal Policies4. Nash and Stackelberg Solutions5. Pareto Optimal Solution