Practical strategies for government–central bank cooperation in resolving debt crises

Document Type : Original Article

Authors

1 Head of the Integration Group, Mazandaran Province Management and Planning Organization.

2 Department of Mathematics, Faculty of Statistics, Mathematics and Computer Science, Semnan University, Semnan, Iran.

3 Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran.

10.22105/fbs.2026.252306
Abstract
Purpose: The purpose of this paper is to examine the interaction between the government and the central bank in stabilizing public debt using a non-cooperative differential game, with government expenditure and tax revenue modeled both independently and as interdependent fiscal variables.
Methodology: A non-cooperative open-loop differential game is developed based on an extended Tabellini framework. Two fiscal-policy structures are modeled and their equilibrium outcomes are evaluated through numerical simulation calibrated for the Iranian economy.
Findings: The results show that modeling government expenditure and tax revenue as interdependent variables reduces the equilibrium public debt from 0.173 to 0.160, the monetary base from 0.075 to 0.062, and the fiscal deficit from 0.080 to 0.067. The convergence rate is 0.307 in the interdependent structure, compared with 0.378 when the fiscal variables are modeled independently.
Originality/Value: The originality of this paper lies in separating government expenditure and tax revenue as independent control variables and comparing this structure with an interdependent fiscal-deficit formulation within a differential-game framework. The findings highlight the importance of coordinated fiscal-policy design for public debt stability.

Keywords


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