DP235 International Monetary Cooperation under Tariff Threats

Author(s):	Giorgio Basevi, Flavio Delbono, Vincenzo Denicolò
Publication Date:	March 1988
Keyword(s):	Monetary Policy, Tariffs, Threat And Punishment Strategies
JEL(s):	311, 420
Programme Areas:	International Macroeconomics, International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=235

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.