Dynamic Games: Engineering-Based Tools for Analyzing Strategic Economic Interactions

This paper gives a brief introduction to the theory of dynamic games as developed mostly by control theorists and engineers and presents some economic applications of this theory. The paper shows how the theory of dynamic games can be applied to problems of economic policy-making with heterogeneous policy-makers, whose behavior is characterized by strategic interactions. In particular, for the case of macroeconomic policy-making in a monetary union, it is illustrated how strategic interactions between governments of the union’s member countries responsible for national fiscal policies and the common central bank responsible for the union’s monetary policy can be studied in a fruitful way, using concepts and results from dynamic game theory as applied to a macroeconomic model.