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Inflation: The Invisible Foot of Macroeconomics

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  • MICHAEL CARTER
  • RODNEY MADDOCK

Abstract

We take a simple, well‐known macroeconomic model and treat it as a game between two players—the government and an all‐embracing union. The payoffs have the form of a prisoner's dilemma. The equilibrium outcome produces unwanted inflation and is not Pareto optimal. This is despite the fact that all participants are assumed to have full information. This result is shown to be quite robust to the form of the model and is not affected if one of the players is forced to announce its strategy in advance. This we call the invisible foot of macroeconomics.

Suggested Citation

  • Michael Carter & Rodney Maddock, 1987. "Inflation: The Invisible Foot of Macroeconomics," The Economic Record, The Economic Society of Australia, vol. 63(2), pages 120-128, June.
    • Handle: RePEc:bla:ecorec:v:63:y:1987:i:2:p:120-128
    DOI: 10.1111/j.1475-4932.1987.tb00644.x
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    References listed on IDEAS

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    1. Soderstrom, Hans Tson, 1985. " Union Militancy, External Shocks and the Accommodation Dilemma," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 335-351.
    2. Hersoug, Tor, 1985. " Workers versus Government-Who Adjusts to Whom?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 270-292.
    3. Shlomo Maital & Yael Benjamini, 1980. "Inflation as Prisoner's Dilemma," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 2(4), pages 459-481, July.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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