Global game
Encyclopedia
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 and game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

, global games are games of incomplete information where players receive possibly-correlated signals of the underlying state of the world. Global games were originally defined by Carlsson and van Damme (1993). The most important practical application of global games has been the study of crises in financial markets
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...

 such as bank runs, currency crises
Currency crisis
A currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...

, and bubbles.

Global games in models of currency crises

Stephen Morris
Stephen Morris (game theorist)
Stephen Morris is an economic theorist and game theorist especially known for his research in the field of global games. In 2007 he became the Alexander Stewart 1886 Professor of Economics at Princeton University. He is the editor of Econometrica for the period 2007-2011.- Biography :Morris...

 and Hyun Song Shin
Hyun Song Shin
Hyun-Song Shin is a South Korean economic theorist and financial economist who did research in the field of global games. In 2006 he became the Hughes-Rogers Professor of Economics at Princeton University...

 (1998) considered a stylized currency crises model, in which traders observe the relevant fundamentals with small noise, and show that this leads to the selection of a unique equilibrium. This result overturns the result in models of complete information
Complete information
Complete information is a term used in economics and game theory to describe an economic situation or game in which knowledge about other market participants or players is available to all participants. Every player knows the payoffs and strategies available to other players.Complete information...

, which feature multiple equilibria.

One concern with the robustness of this result is that the introduction of a theory of prices in global coordination games may reintroduce multiplicity of equilibria (Atkeson, 2001). This concern was addressed in Angeletos and Werning (2006) and Hellwig et. al.(2006). They show that equilibrium multiplicity may be restored by the existence of prices acting as an endogenous public signal, provided that private information is sufficiently precise.
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