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Game-theoretic foundations of monetary equilibrium

Author

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  • Camera, Gabriele
  • Gioffré, Alessandro

Abstract

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.

Suggested Citation

  • Camera, Gabriele & Gioffré, Alessandro, 2013. "Game-theoretic foundations of monetary equilibrium," SAFE Working Paper Series 32, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:32
    DOI: 10.2139/ssrn.2334192
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    References listed on IDEAS

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    1. Koeppl, Thorsten V., 2007. "Optimal dynamic risk sharing when enforcement is a decision variable," Journal of Economic Theory, Elsevier, vol. 134(1), pages 34-60, May.
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    9. Araujo, Luis, 2004. "Social norms and money," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 241-256, March.
    10. Gabriele Camera & Marco Casari, 2014. "The Coordination Value of Monetary Exchange: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 290-314, February.
    11. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
    12. Kimbrough, Erik O. & Smith, Vernon L. & Wilson, Bart J., 2010. "Exchange, theft, and the social formation of property," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 206-229, June.
    13. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    14. Erik O. Kimbrough & Vernon L. Smith & Bart J. Wilson, 2008. "Historical Property Rights, Sociality, and the Emergence of Impersonal Exchange in Long-Distance Trade," American Economic Review, American Economic Association, vol. 98(3), pages 1009-1039, June.
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    Cited by:

    1. Bigoni, Maria & Camera, Gabriele & Casari, Marco, 2020. "Money is more than memory," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 99-115.

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    More about this item

    Keywords

    Social norms; repeated games; cooperation; payment systems;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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