Countries have marketplace-like characteristics because this is where the creation and transfer of value occurs. This value is measured through GDP, which allows investors and government officials in these regional economies to baseline how much value is being created and transferred. Government entities have several tools at their disposal to influence the economy in order to achieve specific economic goals.
Video games created virtual worlds that were still governed by economic laws, with one of the early research in the space done in the 1990’s by researcher Edward Castronova. These gaming economies acted like countries since they also facilitated the creation and transfer of value. This value was limited to inside the gaming economy, up until blockchain technology was integrated to video games in 2017, and rose in popularity in 2021.
Since then, game developers building blockchain games not only have to produce a fun and engaging product, but also create mechanisms for a balanced economy within their virtual world. In this sense, game developers also act as the governing body of the ecosystem, especially at the early stages of the project. Therefore, creating mechanisms that developers can use to influence the economy is a must when building blockchain games.
With this in mind, this article starts by exploring different monetary and fiscal policies that governing bodies of regional economies use to influence their economy. These policies will then be taken into the context of blockchain gaming economies, before ending with some key insights that developers should keep in mind about their economy.
Government agencies and regulatory bodies within regional economies have tools at their disposal that they use to influence the economy in order to achieve a specific goal. These come in the form of Monetary and Fiscal policies.
Monetary policy is managed by a country’s Central Bank with the goal of balancing economic growth and price stability. Inflation is seen to decrease an economy’s growth rate and causes uncertainty in the economy (Hameed, 2011). Therefore, keeping inflation rate low (Friend, 2000) and prices stable (Blejer, 2000) are one of the main functions of the Central Bank. The agency manages this through contractionary or expansionary monetary policies that influence the money supply in an economy through changing interest rates, issuing of bonds, or printing of money.
Inflation is generally seen as impacting the economy negatively as it causes economic uncertainty, which negatively affects the growth of an economy’s output (Lucas, 1973). However, there is a tradeoff between inflation fluctuations and output variability (McCaw, 2005). Therefore, Central Banks set an inflation target, depending on the overall goals of the economy, and implement monetary policies to stay within the set inflation rate range.
Changing short term interest rates affects overall money supply as it influences how much money is taken out of circulation. Higher interest rates means greater profits for those who put their money inside the bank, causing money supply to contract. Another monetary policy tool that Central Banks have is the issuing of bonds. Bonds are considered a generally safe investment instrument, therefore issuing more bonds means taking more money out of circulation, while buying back bonds is the opposite. Lastly, the Central Bank has the power and authority to print money as an expansionary monetary policy that directly affects money supply.
A cohesive policy structure is needed since policy volatility affects economic growth negatively (Fatas and Mihov, 2011). Monetary policy alone is not sufficient in order to fully impact the economy. A sound fiscal policy should also compliment any monetary policy done in the economy.
Fiscal policy affects how the government collects revenue, through taxes or debt, and how it exhausts its budget, through government spending. Research done by (Vdovychenko, 2018) shows that fiscal policy stimulates economic growth if the fiscal multiplier is greater than one. The value of this fiscal multiplier is affected by various factors, including trade openness, labor regidity, exchange rate regime, public debt, business cycles, politics, and other factors.
There are three types of fiscal policies that the government can utilize – contractionary, expansionary and neutral fiscal policies. Contractionary fiscal policy is when the government spends less than what it taxes and is usually done to slow down economic growth due to high inflation. New taxes are introduced that slow down consumer spending in the process. Expansionary fiscal policy is when the government spends more than what it taxes to stimulate the economy, usually in times of recession, to put more money for consumers to spend. While a fiscally neutral policy is where the government equally spends what it taxes.
The fiscal multiplier being greater than one means that one additional dollar of stimulus causes a real GDP growth of greater than one dollar. This determines the effectiveness of fiscal stimulus to the economy. Trade openness affects the fiscal multipliers by influencing the demand for domestically produced goods, labor rigidity complicates the desired outcome, while flexible exchange rates tend to diminish a fiscal shock. Public debt reroutes the budget towards repayment instead of fiscal stimulus, business cycles influence what kind of fiscal policy a government should take, while politics hinder government budget allocations.
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