Game-Theoretic Foundations of Monetary Equilibrium
SAFE Working Paper No. 32
34 Pages Posted: 3 Oct 2013
Date Written: September 30, 2013
Monetary theorists have advanced an intriguing notion: we exchange money to make up for a lack of enforcement, when it is difficult to monitor and sanction opportunistic behaviors. We demonstrate that, in fact, monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude enforcement — external or not. Simply put, monetary systems cannot operate independently of institutions — formal or informal — designed to monitor behaviors and sanction undesirable ones. This fundamental result is derived by integrating monetary theory with the theory of repeated games, studying monetary equilibrium as the outcome of a matching game with private monitoring.
Keywords: Social norms, repeated games, cooperation, payment systems
JEL Classification: E4, E5, C7
Suggested Citation: Suggested Citation