MONETARY-POLICY GAMES WITH BROAD MONEY TARGETS - A LINEAR-QUADRATIC CONTROL ANALYSIS OF THE US AND JAPAN

This paper compares the different outcomes, from noncooperative and co operative equilibria, when the Federal Reserve and the Bank of Japan f ollow monetary policies based on broad money-supply targets. The analy sis is an application of stochastic linear quadratic control methods, and combines vector-autoregressive models with forward-looking efficie nt market models for asset prices. The results indicate that the use o f broad money targets bring significant welfare gains to both countrie s, in terms of reduced volatility of nominal income, broad money, exch ange rates, and asset prices. However, there appears to be little diff erence between cooperative and noncooperative monetary policy arrangem ents.