Time Inconsistency, Inflation Expectation and Economic Growth: Application of Game Theory
Abstract
Economic agents need the solving for decision problems occurred in the result of the impact of the decision of certain rational agent on the other agent’s reward. This is what classical game theory does. The inflation in terms of classical game theory has been suggested and analyzed. That’s why the main idea of this paper is to examine the classical Barro-Gordon game model for inflation. It gives us the clear picture of inflation expectations and time inconsistency problems in the field of macroeconomics. Time inconsistency occurs when the weak policymakers are intended to realize the high inflation rate, when the society expects for the low one. As the result, public or society decides to punish those weak policymakers. Accordingly, we are going to consider how the public’s expectations for a low inflation rate can lead to the Nash equilibrium for the time inflation in the Barro-Gordon model, which will resolve the problem of this game.Copyright
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