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A Game Theoretic Approach to the Theory of Money and Financial Institutions

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Abstract

This is a sketch of a game theoretic and gaming approach to the development of an appropriate microeconomic theory of money and financial institutions. The phrase "money and financial institutions" is used to stress that a theory of money alone cannot be fruitfully constructed in an institutional vacuum. The monetary and financial system of an economy are part of the socio-politico-economic control mechanism used by every state to connect the economy with the polity and society. This neural network provides the administrative means to collect taxes, direct investment, provide public goods, trade. The money measures provide a crude but serviceable basis for the accounting system which in turn, along with the codification of commercial law and financial regulation are the basis for economic evaluation and the measurement of trust and fiduciary responsibility among the economic agents. A central feature of a control mechanism is that it is designed to influence process. Dynamics is its natural domain. Equilibrium is not the prime concern, the ability to control the direction of motion is what counts. Bagehot (1962) noted that a financial instrument originally designed for one purpose may take on a life of its own and serve a different purpose. In particular most of the instruments may have been invented to facilitate trade but they provided a means for control. Money and financial institutions provide the command and control system of a modern society. The study of the mechanism, how they are formed, how they are controlled and manipulated and how their influence is measured in terms of social, political, and economic purpose pose questions not in pure economics, not even in a narrow political economy, but in the broad compass of a political economy set in the context of society. A basic purpose of the approach adopted here is to show the minimal conditions which require that financial institutions and instruments emerge as a necessary carriers of process. The thrust is for the development of a mathematical institutional economics.

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File URL: http://cowles.econ.yale.edu/P/cd/d08a/d0805.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 805.

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Length: 74 pages
Date of creation: Nov 1986
Date of revision:
Publication status: Published in B. M. Friedman and F.H. Hahn, eds., Handbook of Monetary Economics, Vol. 1, Elsevier Science, 1990, pp. 172-219
Handle: RePEc:cwl:cwldpp:805

Note: CFP 767.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Game theory; money; financial institutions; mathematical institutional economics;

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References

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  1. Hurwicz, Leonid, 1973. "The Design of Mechanisms for Resource Allocation," American Economic Review, American Economic Association, vol. 63(2), pages 1-30, May.
  2. Scarf, Herbert E, 1986. "Neighborhood Systems for Production Sets with Indivisibilities," Econometrica, Econometric Society, vol. 54(3), pages 507-32, May.
  3. Shubik, Martin, 1975. "On the Eight Basic Units of a Dynamic Economy Controlled by Financial Institutions," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 21(2), pages 183-201, June.
  4. Rogawski, J. & Shubik, M., 1986. "A strategic market game with transactions costs," Mathematical Social Sciences, Elsevier, vol. 11(2), pages 139-160, April.
  5. Amir, Rabah & Sahi, Siddharta & Shubik, Martin & Yao, Shuntian, 1990. "A strategic market game with complete markets," Journal of Economic Theory, Elsevier, vol. 51(1), pages 126-143, June.
  6. Nti, Kofi O. & Shubik, Martin, 1984. "Noncooperative exchange using money and broker-dealers," Mathematical Social Sciences, Elsevier, vol. 7(1), pages 59-82, February.
  7. Koopmans, Tjalling C, 1977. "Concepts of Optimality and Their Uses," American Economic Review, American Economic Association, vol. 67(3), pages 261-74, June.
  8. Douglas Gale & Martin Hellwig, 1984. "A General-Equilibrium Model of the Transactions Demand for Money," STICERD - Theoretical Economics Paper Series 100, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  9. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
  10. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  11. Dubey, Pradeep & Mas-Colell, Andreau & Shubik, Martin, 1980. "Efficiency properties of strategies market games: An axiomatic approach," Journal of Economic Theory, Elsevier, vol. 22(2), pages 339-362, April.
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  13. Jaynes, Gerald David & Okuno, Masahiro & Schmeidler, David, 1978. "Efficiency in an Atomless Economy with Fiat Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(1), pages 149-56, February.
  14. Forges, Francoise & Peck, James, 1995. "Correlated Equilibrium and Sunspot Equilibrium," Economic Theory, Springer, vol. 5(1), pages 33-50, January.
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  19. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  20. Dubey, Pradeep & Shubik, Martin, 1977. "Trade and Prices in a Closed Economy with Exogeneous Uncertainty, Different Levels of Information, Money and Compound Futures Markets," Econometrica, Econometric Society, vol. 45(7), pages 1657-80, October.
  21. Martin Shubik & Ward Whitt, 1973. "Fiat Money in an Economy with One Nondurable Good and No Credit (A Noncooperative Sequential Game)," Cowles Foundation Discussion Papers 355, Cowles Foundation for Research in Economics, Yale University.
  22. Pradeep Dubey & Lloyd S. Shapley, 1977. "Noncooperative Exchange with a Continuum of Traders," Cowles Foundation Discussion Papers 447, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Irasema Alonso, 2004. "Persistent, Nonfundamental Exchange Rate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 687-706, July.
  2. Irasema Alonso, 1991. "Patterns of exchange, fiat money and the welfare costs of inflation," Economics Working Papers 63, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1993.
  3. Chwe, Michael Suk-Young, 1999. "The Reeded Edge and the Phillips Curve: Money Neutrality, Common Knowledge, and Subjective Beliefs," Journal of Economic Theory, Elsevier, vol. 87(1), pages 49-71, July.
  4. Honohan, Patrick & Vittas, Dimitri, 1996. "Bank regulation and the network paradigm : policy implications for developing and transition economies," Policy Research Working Paper Series 1631, The World Bank.
  5. Martin Menner, 2006. "Monetary Propagation In Search-Theoretic Monetary Models," Economics Working Papers we066426, Universidad Carlos III, Departamento de Economía.
  6. Wallace, Neil, 2000. "A model of the liquidity structure based on asset indivisibility," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 55-68, February.
  7. Honohan, Patrick, 1999. "A model of bank contagion through lending," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 147-163, June.

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