Game theory, monetary policy and central bank independence before the dynamic inconsistency literature: Nyblén’s macroeconomic distributive games
New Classical Economics is often attributed an unprecedented use of game theory in macroeconomics. Indeed, game theory remained unnoticed by macroeconomists until the 1970s and macroeconomic applications of game theory were very rare, unlike microeconomic ones. However, the exceptions proving the rule are interesting precedents for the historian of economic thought. The Swedish economist Göran Nyblén was the pioneer in the application of game theory to macroeconomics. In a PhD thesis supervised by Johan Åkerman and carried out between Sweden and the US, where he was one of Morgenstern's first pupils at Princeton, Nyblén (1951) dealt with macroeconomic problems, such as the determinants of interest rates and inflation, within the framework of game theory. Despite some recognition by two specialists in game theory and its history (Pohjola, 1986; Shubik, 1982), Nyblén’s contribution to macroeconomic games has been neglected. In a recent paper dedicated to the French reaction to game theory in the 1950s, Nessah, Tazdaït & Vahabi (2021) refer to Nyblén’s pioneering application of game theory to macroeconomics but do not provide a detailed analysis. Thus, the implications of Nyblén’s work for the history of macroeconomic games have not yet been assessed as well as his contributions to the economic thought on monetary policy and central bank independence. This paper intends to fill these gaps. The interest of studying Nyblén’s work goes beyond the fact that it is an exceptional precedent in the history of macroeconomic games. It also lies with the informative methodological and theoretical contrast between Nyblén’s and modern macroeconomic games, particularly those of the dynamic inconsistency literature. Nyblén uses cooperative games in order to explain the evolution of interest rates and the general price level as the outcome of a zero-sum game between social groups for the distribution of national income. The outcome of these games is the determination of distributive shares and the general price level. The dynamic inconsistency literature uses non-cooperative games and focuses on the definition of monetary policy by a benevolent social planner. The outcome of these games is the determination of macroeconomic policy and magnitudes such as the general price level and unemployment that result from the interaction between the social planner and a representative agent. After the Lucas critique (1976) and the dynamic inconsistency argument put forward by Kydland & Prescott (1977), the determination of macroeconomic stabilization policies is no longer considered as an optimal control problem (Persson & Tabellini, 1990; Tabellini, 2005; Wan, 1985). If, on the one hand, there are macroeconomic policy games providing an “analysis of macroeconomic policy as a game” (Driffill, 1988, p.533), on the other hand, the analysis of the distribution of national income as a game can be called macroeconomic distributive games.
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Keywords: Central Bank Independence, Game Theory, History of Economic Thought, Macroeconomics, Monetary Policy