International monetary cooperation under tariff threats

We analyse games between two countries that use the tariff as a threat to induce each other to follow monetary policies equivalent to those that would obtain under a cooperative game. The analysis shows that, under certain assumptions concerning the shares of tariff revenues that the countries spend on imports, the punishment structure, and the discount factors, the outcome of the game converges to a cooperative-equivalent equilibrium, with zero tariffs and optimal monetary policies. It is suggested that the model could be applied to current relations between the United States, West Germany and Japan.