Empirical and Normative Economics: A Game Theoretic Approach ()
ABSTRACT
An important problem in public
finance is the interaction of public finance with private finance—particularly when
private financial markets crash, then bank runs occur, and a central bank needs
to bail out the banks to prevent an economic depression. Historically, private financial markets have
periodically crashed (financial bubbles);
and then public finance (central bank reserves) have sometimes bailed out
banks, to prevent a depression. The reason this pattern (of a lack of
regulation to prevent financial bubbles, but then bailing out banks) has historically
recurred has been the use of an idealized economic theory of “perfect market”—used in economic policy to avoid appropriate
regulation of a financial market. In this research, we formulate a
“game-theoretic approach” to include financial regulation as an explicit part
of the model of a financial market. Future research direction from this game
approach can extend the traditional “endogenous economic theory of markets”
into an empirical modeling technique—which can ground economic theory in the real history of market instabilities.
Share and Cite:
Betz, F. (2020) Empirical and Normative Economics: A Game Theoretic Approach.
Theoretical Economics Letters,
10, 655-695. doi:
10.4236/tel.2020.103042.
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