Game-theoretic foundations of monetary equilibrium

Gabriele Camera and Alessandro Gioffré

No 32, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

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.

Keywords: Social norms; repeated games; cooperation; payment systems (search for similar items in EconPapers)
JEL-codes: C7 E4 E5 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-gth, nep-hpe, nep-mac, nep-mic and nep-mon
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Journal Article: Game-theoretic foundations of monetary equilibrium (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:32

DOI: 10.2139/ssrn.2334192

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