How game theory lessons can help in fiscal crisis..

Nice bit by Renee Haltom of Richmond Fed. Just wish she had more examples from game theory here..

Self-restraint with an eye toward long-term goals is a recurring theme when game theory is applied to the policy world, where expectations about future policy drive the behavior of households, businesses, and investors today. Then it can be valuable to create the expectation that  policymakers will follow through on promises to make responsible policies even when those policies are no longer in the policymaker’s self-interest.

This lesson of game theory points to a few things current policymakers might do to prevent fiscal and economic  catastrophe in the face of ever-growing debt. For fiscal  policymakers, that could mean committing, somehow,  to not running debts beyond control; for monetary policymakers, it could mean committing themselves, somehow, to not stepping in to shoulder the burden. But a fundamental  lesson of game theory is that making promises credible can be tricky.

 

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