Guiding the Economy Toward the Target Inflation Rate: An Evolutionary Game Theory Approach

Under what condition is the target inflation rate attainable even after the monetary policy rate hits its lower bound? This study examines the question using a dynamic model based on evolutionary game theory. In the model, entrepreneurs and workers iteratively play a stage game to make investment decisions. In the presence of complementarity between entrepreneurs' and workers' investments, two long-run equilibria exist: all players invest or no player invests. The study shows two conditions for successfully guiding the economy toward the long-run equilibrium that all players invest at the target inflation rate. First, the type of entrepreneurs' investments needs to be demand- creating innovation rather than cost-reducing innovation. Second, the proportions of entrepreneurs and workers currently investing must be sufficiently large.