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Green central banking and game theory: The Chicken Game-approach

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  • Alex, Fabian

Abstract

This paper investigates the determinants of the probability that a central bank chooses to make its financial sector green. We derive a mixed-strategy Nash equilibrium from a strategic setting of two monetary authorities choosing simultaneously between the alternatives of greening and conducting business as usual. Using a very general setup, we obtain a model that nests most of the usual 2 × 2-situations in game theory. “Green” avoids a country’s contribution to an externality experienced by both, but also encompasses a sacrifice of slowing down economic performance. The probability of greening is found to decrease whenever “greening” means a larger sacrifice for the other country, while it increases with the size of both countries, the rate of internalization applied to the externality as well as the severity of this externality. Unlike the typical (pure) free-riding approach to international coordination on environmental issues, we find some willingness of countries to sacrifice wealth for the sake of avoiding a worst case. In a repeated setting, cooperative solutions can be established. The influence of discounting on the stability of these solutions is ambiguous.

Suggested Citation

  • Alex, Fabian, 2024. "Green central banking and game theory: The Chicken Game-approach," Economic Systems, Elsevier, vol. 48(4).
    • Handle: RePEc:eee:ecosys:v:48:y:2024:i:4:s0939362524000736
    DOI: 10.1016/j.ecosys.2024.101251
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    References listed on IDEAS

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    More about this item

    Keywords

    Environment; Environmental economics; Green economics; Game theoretic; Game theory; Games; Mixed strategy; Two player; Public goods game; Strategic game;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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