• Optimal Economic Intervention: A Bayesian Global Games Approach to Policy Design

This paper extends the framework set forth by Inostroza and Pavan (2023) by incorporating a mechanism through which policymakers can actively influence economic fundamentals, previously considered exogenous. Through a global games model, we explore the strategic implementation of an expansionary policy – and its associated cost function – that shifts the distribution of economic fundamentals rightward, compared to a non-interventionist policy which maintains the status quo. We evaluate the
conditions under which such proactive policy interventions are preferable in enhancing market stability and preventing an unfavourable regime switch leading to negative economic consequences such as bank runs and currency attacks. Through an integral assessment approach and the consideration of macroeconomic theory, we quantify the benefits of expansionary over non-interventionist policies, thus providing insight into how strategic economic intervention can mitigate the risks associated with adverse market
coordination.