Martin Shubik and Eric Smith
- Published in print:
- 2016
- Published Online:
- May 2017
- ISBN:
- 9780262034630
- eISBN:
- 9780262337540
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262034630.003.0002
- Subject:
- Economics and Finance, Econometrics
The General Equilibrium system provides a pre-institutional modeling structure appropriate to studying many allocative properties of the price system. The economies we live in ere encompassed by ...
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The General Equilibrium system provides a pre-institutional modeling structure appropriate to studying many allocative properties of the price system. The economies we live in ere encompassed by their polities and societies. The task laid out here is to indicate how to build process models of the economy that are consistent with the General Equilibrium system, but build out in a systematic manner towards the multitude of institutions that are the carriers of process in an ongoing society. It is argued here that this can be done in such a manner that there is a natural cascade of process models consistent with General Equilibrium: but these become progressively more complex as new functions are required to support the dynamics of the society. The first step into a mathematical institutional economics involves the invention of markets and money and the endogenization of price formation.Less
The General Equilibrium system provides a pre-institutional modeling structure appropriate to studying many allocative properties of the price system. The economies we live in ere encompassed by their polities and societies. The task laid out here is to indicate how to build process models of the economy that are consistent with the General Equilibrium system, but build out in a systematic manner towards the multitude of institutions that are the carriers of process in an ongoing society. It is argued here that this can be done in such a manner that there is a natural cascade of process models consistent with General Equilibrium: but these become progressively more complex as new functions are required to support the dynamics of the society. The first step into a mathematical institutional economics involves the invention of markets and money and the endogenization of price formation.
Thomas Quint and Martin Shubik
- Published in print:
- 2014
- Published Online:
- May 2014
- ISBN:
- 9780300188158
- eISBN:
- 9780300199222
- Item type:
- book
- Publisher:
- Yale University Press
- DOI:
- 10.12987/yale/9780300188158.001.0001
- Subject:
- Economics and Finance, Macro- and Monetary Economics
This book is about using game theory to model money and financial institutions. Using the backdrop of a simple two-good economy with two continua of traders, we propose a strategic market game to ...
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This book is about using game theory to model money and financial institutions. Using the backdrop of a simple two-good economy with two continua of traders, we propose a strategic market game to explicitly model the moves that accomplish trade. We then study variations on this simple model, to understand such things as changing the type of money used in the economy (consumable storable money vs gold vs fiat money) and/or the trading structure (buy-sell vs sell all), the role of banks (both central banks and private banks), the market structure for banking (monopoly vs oligopoly vs perfect competition), bankruptcy, and credit clearinghouses. We are also able to examine the process of a gold demonetization in favor of fiat money. The key feature that allows this is that the players’ decision problems are dynamic, each with a fully defined state space. The physical money is tracked throughout. Hence the players’ optimizations all have inequality constraints reflecting their cash flows. Indeed, our models link the timeless general equilibrium analysis with the fully dynamic complex world around us where the institutions constrain the dynamics. We are able to solve (most of) the models analytically, using the solution concept of (perfect) noncooperative equilibrium. This allows us to perform sensitivity analyses, which show how the “phases” of the economies change as a function of the amount of money in the economy. Finally, we comment throughout the book on how overly simplified the models have to be in order to portray the above phenomena while still being solvable. Hence by themselves they are not realistic. However, they do represent a first step in building a more realistic theory of money and financial institutions.Less
This book is about using game theory to model money and financial institutions. Using the backdrop of a simple two-good economy with two continua of traders, we propose a strategic market game to explicitly model the moves that accomplish trade. We then study variations on this simple model, to understand such things as changing the type of money used in the economy (consumable storable money vs gold vs fiat money) and/or the trading structure (buy-sell vs sell all), the role of banks (both central banks and private banks), the market structure for banking (monopoly vs oligopoly vs perfect competition), bankruptcy, and credit clearinghouses. We are also able to examine the process of a gold demonetization in favor of fiat money. The key feature that allows this is that the players’ decision problems are dynamic, each with a fully defined state space. The physical money is tracked throughout. Hence the players’ optimizations all have inequality constraints reflecting their cash flows. Indeed, our models link the timeless general equilibrium analysis with the fully dynamic complex world around us where the institutions constrain the dynamics. We are able to solve (most of) the models analytically, using the solution concept of (perfect) noncooperative equilibrium. This allows us to perform sensitivity analyses, which show how the “phases” of the economies change as a function of the amount of money in the economy. Finally, we comment throughout the book on how overly simplified the models have to be in order to portray the above phenomena while still being solvable. Hence by themselves they are not realistic. However, they do represent a first step in building a more realistic theory of money and financial institutions.
Thomas Quint and Martin Shubik
- Published in print:
- 2014
- Published Online:
- May 2014
- ISBN:
- 9780300188158
- eISBN:
- 9780300199222
- Item type:
- chapter
- Publisher:
- Yale University Press
- DOI:
- 10.12987/yale/9780300188158.003.0001
- Subject:
- Economics and Finance, Macro- and Monetary Economics
We explain the main idea of the book—namely, to show how to model money and financial institutions using game theory. This represents a departure from the traditional general equilibrium and monetary ...
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We explain the main idea of the book—namely, to show how to model money and financial institutions using game theory. This represents a departure from the traditional general equilibrium and monetary theory methods. This is done by presenting a series of dynamic strategic market game models of a simple two-good economy. The models are necessarily overly simplified, encompassing only minimal institutions, omitting sectors such as production. We close with a sketch of the contents of each chapter.Less
We explain the main idea of the book—namely, to show how to model money and financial institutions using game theory. This represents a departure from the traditional general equilibrium and monetary theory methods. This is done by presenting a series of dynamic strategic market game models of a simple two-good economy. The models are necessarily overly simplified, encompassing only minimal institutions, omitting sectors such as production. We close with a sketch of the contents of each chapter.
