GAME THEORY IN THE ANALYSIS OF MONETARY AND FISCAL POLICY ON THE EXAMPLE OF REPUBLIC OF CROATIA

Abstract

The paper explored the interaction of monetary and fiscal policy through game theory. In the first part of the paper it isin short presented theoretical basis of fiscal and monetary policy, and then explained the theoretical part of game theory also in short. After theoretical part, the analysis was conducted based on the collected data and then the results of the paper are presented. A function of payments for monetary and fiscal policy have been created on the basis of data inflation, unemployment rate, total liquidity and the rate of government spending in the Republic of Croatia. Multiple linear regression, which is processed using software solutions Eviews, derived parameters for independent variables. In this way, holders of monetary and fiscal policy can decide on quantities of independent variables, and based on that, determine their strategy. The obtained result, based on the functions of payments for monetary and fiscal policy, generated the matrix of payments. Solving the matrix of payments resulted with non-dominated solutions. For solving the problem, PROMETHEE method has been applied. Analysing the game by using the PROMETHEE method, it generated optimal solutions in terms of assumption when a greater impact on the economy, in this case on the inflation and unemployment, has the fiscal policy and in terms of assumption when a greater impact on the economy has monetary policy. As the optimal results we obtained only two strategies although the game has been repeated in many stages.