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Game Theoretic Modeling of Economic Systems and the European Debt Crisis

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  • Jonathan William Welburn

    (University of Wisconsin-Madison)

  • Kjell Hausken

    (University of Stavanger)

Abstract

A game theoretic model of six kinds of players is analyzed, i.e. countries, central banks, banks, firms, households, and financial inter-governmental organizations. Each player has a strategy set, with strategies such as setting interest rates, lending, borrowing, producing, consuming, investing, importing, exporting, defaulting, and penalizing default. Markets for goods, debt, and capital are modeled endogenously. This conceptualization of strategic opportunities for as many as six types of players is richer than anything that has been attempted earlier. 2005–2011 empirical data for Greece is used to analyze how utility is impacted by public consumption and lump sum transfers, and negative productivity shocks, and to analyze equilibrium over several time periods with and without the possibility of default. 2007–2008 empirical data for Greece and Germany is used to determine how the two countries’ utilities depend on Greece’s public 2007 consumption, with and without negative productivity shocks. Greece’s high debt burden is shown to make default optimal when productivity shocks are large and the default penalty is small. We find that Germany has limited ability, through its available strategies, to prevent a Greek default, and may need to resort to unconventional tools such as debt forgiveness and changing the default penalty.

Suggested Citation

  • Jonathan William Welburn & Kjell Hausken, 2017. "Game Theoretic Modeling of Economic Systems and the European Debt Crisis," Computational Economics, Springer;Society for Computational Economics, vol. 49(2), pages 177-226, February.
  • Handle: RePEc:kap:compec:v:49:y:2017:i:2:d:10.1007_s10614-015-9542-3
    DOI: 10.1007/s10614-015-9542-3
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    Cited by:

    1. Jonathan W. Welburn, 2020. "Crises Beyond Belief: Findings on Contagion, the Role of Beliefs, and the Eurozone Debt Crisis from a Borrower–Lender Game," Computational Economics, Springer;Society for Computational Economics, vol. 56(2), pages 263-317, August.
    2. Anubha Goel & Aparna Mehra, 2019. "Analyzing Contagion Effect in Markets During Financial Crisis Using Stochastic Autoregressive Canonical Vine Model," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 921-950, March.
    3. Guizhou Wang & Kjell Hausken, 2021. "Governmental Taxation of Households Choosing between a National Currency and a Cryptocurrency," Games, MDPI, vol. 12(2), pages 1-24, April.

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    More about this item

    Keywords

    Game theory; Sensitivity analysis; Economic risk; Default; Contagion;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • G01 - Financial Economics - - General - - - Financial Crises

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