A Fundamental Cause of Economic Crisis―A Macro-economic Game between the Real Economic Sector and Monetary Sector

This study examines a fundamental cause of the economic crisis from which the current capitalist economy is suffering. We posit that the cause is an imbalance between the real economic sector and the monetary sector. To test this hypothesis, we construct a differential game. Players are the agents selected by the two sectors. We adopt linear objective functions, because if we adopt concave objective functions, the analysis is restricted to examining the first and the second order conditions to maximize the Hamiltonians. A main theoretical originality of this study is to describe how players and policy makers should play to ensure balance between the real economic and the monetary sectors in the capitalist economy. The auxiliary equations do not have any stable steady state points under the linear functions. The game requires two rules to have a solution. One rule is the strategy rule that requires players to adopt a strategy that makes the strategy exchange point coincide with the steady state point in reaction to the other player’s strategy. The other rule is the policy rule that requires the policy-maker (Central Bank) to control the strategy exchange point of the monetary sector by undertaking buying operation. It is shown that the distribution rate of GDP to the monetary sector has a rigorous range for the game to have a solution. In addition, the solution has the character of a natural economy. We conclude that large deviations from the solution of the game (which we consider as deviations from the natural economy) are a fundamental cause of economic crisis. We investigate actual transitions of the distribution rate in USA, Euro area and Japan to prove our hypothesis in identifying the fundamental cause.