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Incorporating rigidity and commitment in the timing structure of macroeconomic games

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  • Libich, Jan
  • Stehlík, Petr

Abstract

This paper proposes a novel framework that generalizes the timing structure of games. Building on alternating move games and models of rational inattention, the players' actions may be rigid, i.e., infrequent. This rigidity in the timing of moves makes the game more dynamic and asynchronous, acting as a commitment mechanism. Therefore, it can enhance cooperation and often eliminate inefficient equilibrium outcomes present in the static (normal form) game. Interestingly, (i) this can happen even in a finite game (possibly as short as two periods) and (ii) without reputation building. Furthermore, (iii) the required degree of commitment may be under some circumstances arbitrarily low and under others infinitely high. Our main example comes from macroeconomics in which various rigidities have played a central role. Investigating the Kydland-Prescott-Barro-Gordon monetary policy game, we derive the necessary and sufficient degree of long-term policy commitment to low inflation under which the influential time-inconsistency problem is eliminated.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 3 (May)
Pages: 767-781

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:3:p:767-781

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Asynchronous moves Dynamic games Commitment Rigidity Time-inconsistency Inflation targeting Central Bank independence;

References

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Cited by:
  1. Jan Libich & Petr Stehlik, 2009. "Endogenous Monetary Commitment," CAMA Working Papers 2009-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Jan Libich & Dat Thanh Nguyen & Petr Stehlík, 2011. "Monetary Exit Strategy and Fiscal Spillovers," CAMA Working Papers 2011-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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