by Partha Gangopadhyay, The Conversation
Decades ago, before Yanis Varoufakis became the rock-star finance minister of Greece, he and I developed some game-theoretic models of macroeconomics.
The gist of the work was this: for monetary authorities eager to preserve their autonomy, an unequivocally good reputation for relations with the government may not be desirable.
Our work illustrated why a central bank may prefer to be shrouded in ambiguity rather than be known as a strong defender of its monetary policy against government challenges, or otherwise. Why? Because central banks are also involved in contests with other self-seeking interest groups like banks and other financial entities, and the bank’s overall reputation is predicated on these simultaneous contests.
In our youthful exuberance, we sold the model with a sexist parable for delivering a punchline:
“Suppose you are an avatar like Adonis and you have two beautiful divas, Aphrodite and Persephone, as your girlfriends who are blissfully unaware of each other. If you don’t want to come under the wrath of either of them, what should be your rational strategy? Should you reveal your hand? Should you guard it and hide it?â€
The value of ambiguity arises and evolves from the very nature of multiple contests.
As the new finance minister of Greece, Yanis Varoufakis faces a new batch of contests.
The common perception in Greece today is that the government was elected with the main mandate to write off most of the country’s €310 billion in sovereign debt. This is the first contest Yanis is involved in: supporters of the political constituency of Syriza in Greece will put relentless pressure on him to write off the debt.
This contest is more like the classic courtship between Aphrodite and Adonis: Aphrodite (Greek voters) falls in love with young Adonis (nouveau politician Yanis), a fresh political force in Greece, since she is wounded by Eros’ arrow (i.e. crumbling sovereign debts). After the election, Aphrodite now entrusts Yanis with Persephone, the eurozone governments who are the creditors of Greece’s €310 billion sovereign debt. This opens up the second, but interlinked, contest between Yanis and Persephone.
