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Budget balancing in a two-dimensional macroeconomic model

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A two-person nonlinear dynamic game is presented to model the government's strategy to decrease the budget deficit, where Player 1 is the government using fiscal control and Player 2 represents the private sector. In our macroeconomic model the growth rate of the labour force is not known, but its lower and upper bounds are given a priori. This means that the system is uncertain, which makes the determination of an optimal solution (in a Nash, Stackelberg, etc. sense) impossible. Therefore, only a guaranteeing cost control is determined for Player 1. It is shown that the balancing by a guaranteeing cost control is possible even in the most unfavourable situation, when the governmental debt is higher and the volume of fixed capital stock is lower than the equilibrium value.
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Keywords: Guaranteeing cost control; Macroeconomic model; Nonlinear dynamic game; Robust state feedback; Uncertain system

Document Type: Research Article

Affiliations: 1: School of Mathematics, Budapest University of Technology and Economics, Budapest, Hungary 2: Department of Economics, Budapest University of Technology and Economics, Budapest, Hungary 3: ECOSTAT Institute for Economic Analysis and Informatics, Budapest, Hungary

Publication date: April 1, 2007

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