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

Author

Listed:
  • 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.

Suggested Citation

  • Jensen, Henrick & Lockwood, Ben, 1996. "State Manipulation and Asymptotic Inefficiency in a Dynamic Model of Monetary Policy," Discussion Papers 9605, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:9605
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    More about this item

    Keywords

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

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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