A Game-Theoretic Approach to International Monetary Confrontations

Abstract

International monetary confrontations can be regarded as a two-stage game. The first stage is a game situation to agree on a set of monetary rules, i.e., to choose an international monetary regime, and the second stage is a game situation of policy interplays given a set of rules.

The first stage of the game for agreeing on a monetary regime can be characterized as the battle of the sexes; the second stage of the game of policy interplay can be characterized as a variant of the prisoner’s dilemma. If the pay-off of a country is the social welfare that is dependent on the rate of inflation and the balance of payments, then the Cournot-Nash equilibrium as well as the Stackelberg leadership solution lies on the inflationary side of the set of von Neumann solutions under the dollar standard system. This result can be generalized in a dynamic model of world inflation and the balance of payments, by a simple formulation of a differential game.

I have written this work whilst visiting the London School of Economics and Political Science from the University of Tokyo, under a grant from the Japan Foundation, to which I am very grateful. I thank Professor Takashi Takayama for his valuable comments.