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State Manipulation and Asymptotic Inefficiency in a Dynamic Model of Monetary Policy

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Author Info

  • Jensen, Henrick
  • Lockwood, Ben

Abstract

A simple folk theorem of repeated games states that Pareto-efficient outcomes can be achieved in a perfect equilibrium where deviations are punished by a reversion to Nash equilibrium of the associated stage game (Nash threats equilibrium), provided that players are sufficiently patient. In a dynamic version of a well-known monetary policy game we show that such asymptotic efficiency may not be possible, as the presence of a state variable introduces the possibility of state manipulation. Moreover, the lowest inflation rate in Nash threats equilibrium may be increasing as players become more patient.

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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 9605.

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Date of creation: 1996
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Handle: RePEc:exe:wpaper:9605

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Postal: Streatham Court, Rennes Drive, Exeter EX4 4PU
Phone: (01392) 263218
Fax: (01392) 263242
Web page: http://business-school.exeter.ac.uk/about/departments/economics/
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Related research

Keywords: State manipulation; Asymptotic inefficiency; Monetary policy; Unemployment persistence; Dynamic games;

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