Overview
How the mechanics of the game link together, and the loops that make a game stable or not.
In plain words
The game runs the economy of 240 countries, one day at a time. For each one, it tracks what the country produces compared with what it could produce, its prices, its unemployment, the rate of its central bank, the budget and debt of its state, and the popularity of its government, and each of these figures moves towards a target given by a published study, at the speed given by the same study. The world also moves without the player, driven by shocks, part of which is common to all countries, and by events such as a pandemic. Each country has its parties and a parliament that votes on the budget, as well as a population divided into groups that each have their own income and their own opinion. The player holds the spending lines, the taxes, who pays and who receives, and the policy rate, until the day their party holds neither the presidency nor the leadership of the government any more and they lose power.
What the core does, on one page
The structure is that of the IMF's small quarterly projection model (Berg, Karam and Laxton 2006): a demand that responds to the real interest rate, a Phillips curve and a monetary policy rule. To these we add Okun's law, the government budget, its debt and the government's popularity. The IMF authors themselves give the advice “start simple, then extend”, and PREEMINENCE follows the same rule.
All countries run at the same time, in a fixed order, one day at a time. The model simulates 213 of them, every country whose size is given by a source. The other 38 are territories without statistics (§6).
Each variable moves towards a target given by the study, and covers part of the way each day, at the speed given by the same study. Studies reason in quarters or in years. Moving to a daily step keeps two things: the speed at which the gap closes (a quarterly persistence ρ becomes ρ1/91.31 per day) and the point where the variable stops (the long-run target, k / (1 − ρ)).
Non-player countries are run by the rules that the literature estimates: the Taylor rule for the central bank, and a fiscal rule that stabilises the debt and responds to its drift as Bohn measured it. The player's country keeps its levers where the player sets them.
The accounts are kept in levels, not only in ratios, and each payment is recorded twice, once for the payer and once for the receiver (Godley and Lavoie 2007). This is what makes it possible to check, every day, that every euro spent is received somewhere.
The world moves, and you can lose (E13 to E17). Each country is hit by demand and price shocks, sized so that it varies as much as in the data. Its popularity responds to purchasing power. It votes on the date set by its own electoral calendar, and a defeated government is replaced. A debt that approaches its limit pushes rates up and then closes the markets, and default is costly. The central bank's credibility can be won and lost. The player loses when their government falls, at an election or when a default brings it down. Where a president is elected separately, the player loses when their party no longer holds either the presidency or the government (cohabitation does not bring the player down). The player can then carry on the game with the winning party. Part of the shocks is common to the whole world, and events that no country causes (a pandemic, El Niño, a food price spike, a natural disaster) strike at random (E18). Everything optional can be adjusted or switched off for a game.
Every equation is written in full, even when one of its terms needs something the model cannot compute yet (the exchange rate, transfers, foreign-currency debt). Such a term is an unknown, held at a neutral value and recorded in the list of unknowns.
What is not in it yet, on purpose: trade between countries, the exchange rate, credit ratings, hysteresis, and the detail of taxes and spending. They arrive one by one, in the order of §9.
What acts on what
This table answers the question “if I touch this, what moves?”. Each arrow is an equation of §4.
| Variable | What moves it | What it acts on | Equation |
|---|---|---|---|
Output gap output_gap | the real rate above or below the neutral rate; a budget that has just changed (impulse) | inflation (Phillips), unemployment (Okun), the policy rate (Taylor), the share of spending in GDP (stabilisers), nominal GDP and therefore the debt ratio | E1 |
Potential GDP potential | the country's potential growth, which is fixed | real and nominal GDP, and therefore all ratios to GDP | E2 |
| Inflation expectations (internal) | the central bank's target, the memory of past inflation, credibility | the real rate (demand), the Phillips curve, the Taylor rule, the rate at which the government borrows | E3 |
Underlying inflation inflation (internal) | expectations, the output gap | the price level, the memory of inflation | E4 |
| Price shock (internal) | the day's draw, which fades | the published price level, the memory of inflation | E13 |
| World events | chance, according to the catalogue and the settings | the output gap, the price level, potential GDP | E18 |
| Memory of inflation (internal) | the inflation people see, shocks included | expectations | E3 |
| Published inflation, over twelve months | today's price level and that of a year ago | popularity, credibility; this is the figure the player sees | E5 |
Credibility credibility | published inflation, compared with what a credible regime and a de-anchored regime would have produced | the share of expectations that rests on the target | E17 |
Unemployment unemployment | the country's equilibrium unemployment, the output gap | popularity | E6 |
Purchasing power income_growth | real GDP, government revenue | popularity | E14 |
Policy rate policy_rate | the Taylor rule (non-player countries) or the player | the real rate (demand), the rate at which the government borrows | E7 |
Government revenue gov_revenue | the player (lever); the output gap for its cyclical part | the balance, the fiscal impulse (demand) | E1, E8 |
Primary spending primary_spending | the player (lever), or the fiscal rule (non-player countries) | the balance, the fiscal impulse (demand) | E1, E8, E9 |
| Primary balance | revenue, spending, output gap; capped while the country is shut out of the markets | the debt (its flows), the risk premium | E8, E10, E16 |
Public debt gov_debt | interest minus the primary balance, each day; the haircut of a default | the risk premium, the probability of default, the fiscal rule, interest | E10, E11, E16 |
Probability of default default_probability | the debt, between the start of the risk zone and the country's limit | the risk premium; default, certain at the limit and drawn at random before it | E16 |
Effective rate on the debt effective_rate | the market rate, at the pace at which the debt is rolled over | interest, and therefore the debt | E10 |
Popularity popularity | unemployment, published inflation, purchasing power, years in power | the vote | E12, E14 |
| Vote (on election day) | popularity, growth, the number of terms, the day's draw | the government, which is re-elected or replaced | E15 |
What makes the game stable, or not
Loops close within this table, when an effect ends up acting in turn on its own cause, and they are what make the system stable or not.
The monetary loop
- inflation rises
- the central bank raises its rate by more than inflation (Taylor)
- the real rate rises
- demand slows
- inflation comes back down
The fiscal loop
- debt rises
- the non-player government tightens its budget (Bohn)
- the balance improves
- debt comes back down
The tightening weighs on demand for a while (negative impulse).
The debt loop
- debt rises
- the risk premium rises
- interest rises
- debt rises further
Near the limit, the probability of default adds to the premium and the premium soars (E16). Default breaks the loop, at the cost of a haircut, five years shut out of the markets and weaker growth.
The credibility loop
- inflation moves away from the target
- credibility falls
- expectations follow past inflation more closely
- inflation becomes more persistent
It only closes if inflation comes back towards the target fast enough (E17).
The electoral loop
- the economy
- popularity
- the vote
- the seats
- the government
A defeated government is replaced by a coalition of the closest parties, and the next one is judged on the economy it inherits (E12, E15, E20 to E22). The seats also decide what parliament accepts from the player (E25).
The social loop
- a cut makes a group poorer
- its opinion falls, and its anger rises
- it takes to the streets
- the government concedes, or the anger turns into riots
Conceding gives the group back what it lost, provided parliament accepts it, while the firm hand calms the streets for a while without erasing the loss (E27, E28, E33).