Abstract: Existing studies have primarily focused on the technical dimensions of fiscal and monetary policy interaction, while relatively few have examined the institutional linkage between the two from the perspective of the budget management system. This study incorporates the central bank’s profit transfer and loss coverage rules into a two-sector DSGE model by introducing the objective functions and budget constraints of both the fiscal authority and the central bank. The optimal fiscal and monetary policy functions are derived under cooperative and non-cooperative game equilibria.The findings indicate that profit transfer and loss coverage rules significantly influence the policy behavior of both the fiscal authority and the central bank. Central bank profit transfers expand the fiscal space for deficit policies and enhance fiscal sustainability, while fiscal transfers to the central bank increase the flexibility of interest rate policy implementation. However, when deficit and net capital targets are taken into account, both fiscal and monetary authorities tend to deviate from their optimal policy objectives. The policy recommendations proposed in this study provide a reference for improving the institutional mechanisms between fiscal authorities and the central bank, enhancing the independence of monetary policy, strengthening the coordination between the two policies, and establishing a modern fiscal and financial system.

Key words: budget management system, profit transfer and loss coverage rules, fiscal and monetary policy coordination, dynamic stochastic general equilibrium, cooperative and non-cooperative games