Case study 9.2: Monetary policy in Thailand The games people play! The second worst outcome was to concede and Let's have fun with game theory, which can shed not be fired, but that would leave Chatu Mongol with some light on the outcome of the monetary policy his integrity bruised and the central bank with its dispute between Prime Minister Thaksin Shinawatra independence impaired. and former Bank of Thailand governor MR Chatu The third worst outcome was not to concede, and Mongol Sonakul get fired. Though he might lose his job, he could still Many might be perplexed by Chatu Mongol's maintain his integrity and time could prove his stance abrupt dismissal after he refused to cave in to the correct government's demand to raise interest rates. But by Chatu Mongol's strongest preference was not to applying game theory to analyse the jostling between concede, but still keep his job. This outcome would the two, one may find a surprising answer and have a payoff of 4 for him. This would mean he had become more aware of the usefulness of the tool. We beaten Thaksin in their two-way gamesmanship. know that Thaksin and Chatu Mongol took polar Meanwhile, the worst outcome for Thaksin would be positions on the issue and are by nature rather proud for Chatu Mongol to defy his demand, but to keep the and stubborn. So let us begin by constructing what maverick as central bank governor. the payoff matrix for the interest rate policy would The second worst option was for Chatu Mongol have been before Chatu Mongol was sacrificed. to make a concession, but for the PM to have to fire Faced with Thaksin's command to review the the governor anyway to avoid future trouble. The central bank's longstanding low interest rate policy, next worst scenario was for Thaksin to fire Chatu Chatu Mongol could do one of two things - concede Mongol for his defiance . Thaksin's highest to Thaksin, or not give way. Similarly, Thaksin had two preference was for Chatu Mongol to fully agree options in dealing with the obstinate governor - with his demand so that he would not have to get either fire him or keep him. In order to keep the game rid of him as governor. simple, we rank the preferences for the possible outcomes from worst to best, and assign the Questions respective payoffs the numbers 1 through to 4. Chatu 1 Describe the type of game that is involved in the Mongol had made it perfectly clear that he had no above situation intention of changing the low interest rate policy. 2 Draw a game tree of the situation, with the Therefore, the worst outcome for Chatu Mongol was appropriate payoffs. to concede but then get fired, so that outcome would 3 Using the backward induction method, analyse the have a payoff of 1 for him. game tree and explain the result observed