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

Author

Listed:
  • Yasushi Asako

    (Associate Professor, Faculty of Political Science and Economics, Waseda University (E-mail: yasushi.asako@waseda.jp))

  • Tatsushi Okuda

    (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: tatsushi.okuda@boj.or.jp))

Abstract

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 f and workers f 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 f 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.

Suggested Citation

  • Yasushi Asako & Tatsushi Okuda, 2017. "Guiding the Economy Toward the Target Inflation Rate: An Evolutionary Game Theory Approach," IMES Discussion Paper Series 17-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:17-e-03
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    File URL: http://www.imes.boj.or.jp/research/papers/english/17-E-03.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Target inflation rate; Evolutionary game; Best-response dynamics; Perfect-foresight dynamics; Multiple long-run equilibria; Capital-skill complementarity; Demand-creating innovation;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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