Modelling International Policy Games: Lessons from European Monetary Coordination

Most international monetary policy games are modelled as prisoners' dilemma games. Political scientists suggest however that other game-theoretic structures (chicken, stag-hunt and deadlock games) could be more appropriate to describe international monetary coordination. This paper provides some empirical evidence on this issue, by studying the case of European monetary coordination from 1979 to 1989. First, central banks' and governments' preferences are revealed through an analysis of their actual behaviour. Then, the dynamic game describing policymakers' interactions is simulated under alternative institutional arrangements: coordination, defection, sub-group coalitions, etc. The main conclusion is that the stylised facts derived from those experiments seem not to be consistent with the implications of the prisoners' dilemma framework. Consistency is instead found with the features of a stag-hunt game. CEPR and FEEM This revised version was published online in July 2006 with corrections to the Cover Date.