Financial markets and macroeconomic environments are often characterized by positive externalities. In these environments, transparency may reduce expected welfare from an ex-ante point of view: public announcements serve as a focal point for higher-order beliefs and affect agents’...

The model of Morris and Shin [2002] shows that imprecise public announcements can coordinate the actions of speculators far from the fundamental because of over-reaction to announcements. The strong focal potential of common knowledge is welfare damaging when it induces over-reaction to an...

Countries can repeatedly and opportunistically renegotiate the terms of agreements to which they can only complicitly assent. Therefore, when attempting to coordinate exchange rate policies, they continuously play partnership games. We develop a reduced form model of exchange rate management...

We construct a dynamic model of a multi-asset over-the-counter (OTC) market that operates via search and bargaining and empirically test its implications using data from the US corporate bond market. The key novelty in our model is that investors can hold and manage portfolios of OTC-traded...

This article formalizes investor rationality and irrationality, exuberance and apprehension, to consider the implications of belief formation for the fragility of an economy¦s financial structure. The model presented generates a financial structure with portfolio linkages that make it...

An overview is given of the utilization of strategic market games in the development of a game theory based theory of money and financial institutions.

With non-controllable auto-regressive shocks, the welfare of Ramsey optimal policy is the solution of a single Riccati equation of a linear quadratic regulator. The existing theory by Hansen and Sargent (2007) refers to an additional Sylvester equation but miss another equation for computing the...

Two signaling games of monetary policy are considered: game one examines the effect of hysteresis on the labor market on the results of the repeated monetary policy game. Disciplinary effects of reputation disappear in presence of hysteresis. The second game compares weifare effects of monetary...

The interaction of monetary and fiscal policies is a crucial issue in a highly integrated economic area as the European Union. We argue that EMU, which introduced a common monetary policy and restrictions on fiscal policy at the national level, increases the need for macroeconomic policy...