Global game

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In economics and game theory, global games are games of incomplete information where players receive possibly-correlated signals of the underlying state of the world. Global games were originally defined by Carlsson and van Damme (1993). [1]

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Game theory is the study of mathematical models of strategic interaction between rational decision-makers. It has applications in all fields of social science, as well as in logic and computer science. Originally, it addressed zero-sum games, in which one person's gains result in losses for the other participants. Today, game theory applies to a wide range of behavioral relations, and is now an umbrella term for the science of logical decision making in humans, animals, and computers.

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The most important practical application of global games has been the study of crises in financial markets such as bank runs, currency crises, and bubbles. However, they have other relevant applications such as investments with payoff complementarities, beauty contests, political riots and revolutions, and any other economic situation which displays strategic complementarity.

A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy.

A currency crisis is a situation in which serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate. The crisis is often accompanied by a speculative attack in the foreign exchange market. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency.

Global games in models of currency crises

Stephen Morris and Hyun Song Shin (1998) [2] considered a stylized currency crises model, in which traders observe the relevant fundamentals with small noise, and show that this leads to the selection of a unique equilibrium. This result overturns the result in models of complete information, which feature multiple equilibria.

Stephen Edward Morris is an economic theorist and game theorist especially known for his research in the field of global games. In 2007 he became the Alexander Stewart 1886 Professor of Economics at Princeton University. He was the editor of Econometrica for the period 2007–2011.

In economics and game theory, complete information is an economic situation or game in which knowledge about other market participants or players is available to all participants. The utility functions, payoffs, strategies and "types" of players are thus common knowledge.

One concern with the robustness of this result is that the introduction of a theory of prices in global coordination games may reintroduce multiplicity of equilibria (Atkeson, 2001). This concern was addressed in Angeletos and Werning (2006) [3] and Hellwig et al.(2006). [4] They show that equilibrium multiplicity may be restored by the existence of prices acting as an endogenous public signal, provided that private information is sufficiently precise.

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References

  1. Hans Carlsson and Eric van Damme (1993), "Global Games and Equilibrium Selection," Econometrica 61 (5): 989-1018.
  2. Stephen Morris and Hyun Song Shin (1998), "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, 88 (3): 587–97.
  3. George-Marios Angeletos and Ivan Werning (2006), "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, 96 (5): 1720–36.
  4. Christian Hellwig, Arijit Mukherji and Aleh Tsyvinski (2006), "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, 96 (5): 1769-1787.

Further reading

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Kenneth Saul "Ken" Rogoff is an American economist and chess Grandmaster. He is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University.

MIT Press American university press

The MIT Press is a university press affiliated with the Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts.