Abstract
In the previous sections it has been shown that both countries gain by coordinating their intervention policies internationally. However, non-cooperation represents a best response to any given intervention policy of the other country. It follows in particular that non-cooperation will at least weakly dominate the cooperative policy. Thus the game provides no incentive compatible mechanism with which any welfare-improving strategies — in particular of course the cooperative ones — may be realized. This is a general problem of international policymaking which may be represented by the simple payoff matrix in Figure 18:
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Their economic problem, however, is different to the one discussed here. Canzoneri and Henderson analyse an unemployment — inflation tradeoff policy problem of the type introduced by Barro and Gordon [1983].
If many countries are involved it will be increasingly difficult to implement such “reciprocal strategies” (Dawes [1990] and Fischer [1988]). Alternatively, the socio-psychological group identity effect (Dawes [1990]) suggests that discussions and negotiations between the participating decisionmakers motivate policy coordination without the need for such sanctions.
Canzoneri and Henderson [1991] suggest a useful distinction between the terms of “cooperation” and “coordination”: The first is used the same way as it is used in this book. They reserve the term “coordination”, however, for the process of agreeing upon one particular cooperative equilibrium.
In the model here, the costs in terms of risking central bank funds are only implicitly considered. Moreover, intervention costs may be lower if monetary authorities can use interventions to reinvest foreign exchange receipts (see Emminger [1986]).
The weak central bank thus profits from the strong central bank’s reputation. But notice that both countries clearly gain from policy coordination, since mutual welfare gains were already attained with (2) instead of (10).
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© 1993 Physica-Verlag Heidelberg
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Fabian, S. (1993). The International Prisoner’s Dilemma. In: Exchange Rate Management in Interdependent Economies. Handeln und Entscheiden in komplexen ökonomischen Situationen, vol 9. Physica-Verlag HD. https://doi.org/10.1007/978-3-642-50029-9_6
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DOI: https://doi.org/10.1007/978-3-642-50029-9_6
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-7908-0729-5
Online ISBN: 978-3-642-50029-9
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