economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

and game theory, 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 such as

bank runs A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...

, currency crises, and bubbles. However, they have other relevant applications such as investments with payoff complementarities, beauty contests,

political riots Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...

and

revolutions In political science, a revolution (Latin: ''revolutio'', "a turn around") is a fundamental and relatively sudden change in political power and political organization which occurs when the population revolts against the government, typically due ...

, and any other economic situation which displays

strategic complementarity In economics and game theory, the decisions of two or more players are called strategic complements if they mutually reinforce one another, and they are called strategic substitutes if they mutually offset one another. These terms were originally ...

Global games in models of currency crises

Stephen Morris and

Hyun Song Shin Hyun Song Shin () is a South Korean economic theorist and financial economist who focuses on global games. He has been the Economic Adviser and Head of Research of the Bank for International Settlements (BIS) since May 1, 2014. Previously, he ...

(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 In economics and game theory, complete information is an economic situation or game in which knowledge about other market participants or players is available to all participants. The utility functions (including risk aversion), payoffs, strategies ...

, 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. This concern was addressed in Angeletos and Werning (2006) as well as

Hellwig Hellwig is a German surname. Notable people with the surname include: * Christian Hellwig, German economic theorist and macroeconomist * Fritz Hellwig (1912–2017), German CDU politician and European Commissioner * Helen Hellwig (1874–1960), ...

and coauthors (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.

Global games in models of currency crises

References

Further reading