Strategic Interaction Between Monetary and Fiscal Policy in Algeria: a Game Theory Approach

Using a dynamic game theory framework, this study evaluates the interplay of fiscal and monetary policies under various demand and supply shock scenarios in the Algerian economy. Aligning fiscal and monetary policies is essential to mitigate potential conflicts that may arise from uncoordinated actions, such as increased inflation volatility or unsustainable public debt levels, which ultimately reduce societal welfare. In this context, the game theory-based approach utilized in this study to examine the effectiveness of different coordination methods (Nash equilibrium, Stackelberg leadership, and cooperative solution) between Algerian fiscal policy and monetary policy in a conventional macroeconomic optimization issue. Our computational analysis indicates that the cooperative Pareto equilibrium minimizes welfare loss by offering optimal responses to economic shocks, particularly in terms of output stabilization, debt sustainability, and inflation control. Although this study focuses on Algeria, the findings may provide insights for other developing economies with similar macroeconomic and institutional contexts. This study contributes to the literature by quantitatively assessing the effectiveness of policy coordination strategies through a game theory lens, filling a gap in the analysis of fiscal-monetary interplay in developing economies.