Application of Game Theory in Selecting a Global Currency
https://www.devdiscourse.com/Article/147099-theoretic-approach-shows-it-is-beneficial-to-use-sdr-as-global-currency
The article’s main point of discussion is regarding the use of a global currency. The issues stem largely from the fact that, today, the most accepted currency around the world is the United States dollar. As the article mentions, international transactions are generally process using the US dollar, even if neither of the countries involved in the transaction is the United States. The article states that this is an issue given the fact that every country that uses the United States Dollar in these transactions, or every country in general, has widely varying fiscal policies. The best comparison on a smaller scale is the Eurozone, as the article states. The biggest issue with the Eurozone is that we are giving countries with very different fiscal policy, essentially how the government spends and the tax policies they put in place, the same currency and, indirectly “credit rating.” A good example would be comparing Germany and Spain. Spain has a much more lenient fiscal policy which has led them to have economic trouble, yet we give them the same currency and “credit rating” that Germany has because, in the worst case where Spain defaults on their debt, we know that Germany and the rest of the Eurozone will bail them out for the wellbeing of their own economy, as well as the global one.
The solution that the article proposes is adopting the Special Drawing Right, or SDR, as the global currency. The SDR is an aggregation/weighted basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The reason that the article gives for adopting the SDR is also the reason that the article related to our class discussions. Their main point is based on a game theory model. There are two players, essentially the whole country and the rest of the world. The article states that the mutually beneficial scenario is that both of the countries adopt the SDR for transactions, while the remaining option is opt-out of using the SDR. In this case, the best response under a Nash Equilibrium would be that they adopt SDR and continue to trade freely. In another case, as the article states, the home country would be in a worse-off position if it doesn’t accept since it would not be able to partake in international trade. This is a simplified case, however, demonstrates the application of game theory in making economic decisions.