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The inflation game

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  • Wolfgang Kuhle

Abstract

We study a game where households buy consumption goods to preempt inflation. This game features a unique equilibrium with high (low) inflation, whenever money supply is high (low). For intermediate levels of money supply, there exist multiple stable equilibria where inflation is either high or low. Equilibria with moderate inflation, however, do not exist, and can thus not be targeted by central banks. That is, depending on agents' equilibrium play, money supply is always either too high or too low for moderate inflation. Finally, we find that inflation rates of durable goods, such as houses, cars, luxury watches, or furniture, are useful leading indicators for changes in overall inflation.

Suggested Citation

  • Wolfgang Kuhle, 2024. "The inflation game," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 53(1), February.
    • Handle: RePEc:bla:ecnote:v:53:y:2024:i:1:n:e12228
    DOI: 10.1111/ecno.12228
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