The recent financial crisis has again raised the question to what extent price-stability-oriented monetary policy frameworks (bank central) should take into account financial stability objectives.
How could one use game theory in the interaction among goals of central banks, particularly in the trade-off between financial stability and monetary stability?
A really challenging question seducing me to give an answer. Guess you had 20 independant teams working on the same subject, e.g. producing successful mobile phones, true e-cars or financial stability.
Now one of those teams does the opposite/very different to the others, e.g. launching a very expansive mobile phone that runs out of electricity within 20 hours, an e-car for 100k or an interest rate around zero.
Some weeks/months after the launch the other 19 start to assess the results. If the launch was successful, they are going to change their own strategy. If not, they keep staying in their business model.
In both cases the aim to provide mobile communication, e-cars or financial stability is absolute secondary. The teams are not driven by theoretical aims but by their behaviour and the success and failure of it.
So my approach would be to compare the monetary policy of central banks with Tesla and Apple's i-Phone.
Apple and Tesla inflated the price of consumer products. The Fed deflated money.
We may be finding patterns in the group's action. And yes, this is still game theory, because the same may happen by launching a new energy drink made with oak leafs.
thank you for your answer,
but l am looking for work papers or research using a theory game about the bank central, financial stability and monetary stability for my research
A possible starting point is this paper: A Positive Theory of Monetary Policy in a Natural Rate Model, Robert J. Barro and David B. Gordon, Journal of Political Economy, Vol. 91, No. 4 (Aug., 1983), pp. 589-610
I think Professor Iwayemi of the University of Ibadan, Nigeria, game theoretic analyst will be more helpful in this quest. I have no doubt. A very interesting research proposal
Just as stated, the problem doesn't seem to require game theory. It would be a matter of multivariate optimization on the part of the CB. The responses of private-sector decision-makers would be modeled as followers in a Stackelberg leader-follower model. This can be interpreted as a Nash equilibrium in a game in extensive form, with the bank as first mover, and if I remember rightly, that is what Barro and Gordon did in their paper. If, instead, you want to model interactions within a banking oligopoly of a few big private banks and the central bank, then a more conventional Nash equilibrium among them might be appropriate. Even then, the Stackelberg leader-follower model might be appropriate, and is simpler. Overall, perhaps the best first stage would be to refine your question.
I don't see central bank behavior as amenable to game theory either. The premise of game theory is to evaluate possible alternatives against possible actions or reactions by the other players, and then to maximize the minimum returns. But central bank actions should not be 'throwing the pitch that the batter is not looking for.' Standard discretionary actions or rules to address defined objectives, without the intrigue, seems better to me.
My suggestion is that you should start with the central bank loss function. If the central bank choose which financial stability and monetary stability loss function will be minimum losses. In this way, you can think of in the framework of game theory.
Tetik is right, of course, but some of the other issues still arise. And Bias is right, too, in arguing that a mixed-strategy equilibrium is inappropriate to the case. But game theory is more than mixed-strategy equilibrium. In particular, when the game is noncooperative but allows some communication, a correlated strategy solution may occur. As Aumann notes, one way to achieve this is for a neutral third party to provide appropriately coordinated signals to the players. If, then, we model the private sector decisions as a large-scale coordination game, and treat the central bank as the neutral third party -- more or less neutral! -- there might be some interesting insights on information-release and secrecy as well as rules vs. discretion.
Resources:
Rosenstein-Rodan, Paul (1943), “Problems of Industrialization of Eastern and South-Eastern Europe,” Economic Journal v. 53, (June-Sept) pp. 202-211.
Although not game-theoretic, this sets the stage for treating the private-sector decisions as a coordination game.
Aumann, Robert J. (1974), “Subjectivity and Correlation in Randomized Strategies,” Journal of Mathematical Economics v. 1, pp. 67-96.
McCain, Roger A. (2014), Game Theory: A Nontechnical Introduction to the Analysis of Strategy, Third Edition (Singapore: World Scientific Publishers), pp. 251-254
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