Working Paper: CEPR ID: DP235
Authors: Giorgio Basevi; Flavio Delbono; Vincenzo Denicola
Abstract: We analyse games between two countries which use the threat of imposing a tariff to induce each other to follow monetary policies equivalent to those that would obtain under a cooperative game. The analysis shows that -- under certain assumptions concerning the shares of tariff revenues, what the countries spend on imports, the punishment structures and the discount factors -- the outcome of the game converges to the equivalent of the cooperative equilibrium, with zero tariffs and optimal monetary policies. It is suggested that the model could be applied to current relations between the US, Germany and Japan.
Keywords: monetary policy; tariffs; threat; punishment strategies
JEL Codes: 311; 420
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tariff threats (F19) | monetary policy outcomes (E52) |
| tariff threats (F19) | cooperative monetary outcomes (P13) |
| tariff threats (F19) | Nash equilibrium (C72) |
| Nash equilibrium (C72) | cooperative equilibrium (C71) |
| US protectionism (F52) | cooperative monetary policies in surplus countries (E63) |
| tariff threats may fail to induce cooperation (D74) | discount rate and patience of countries (H43) |
| cooperative monetary outcomes (P13) | employment levels (J23) |
| cooperative monetary outcomes (P13) | trade balances (F10) |