Inflation: The Invisible Foot of Macroeconomics

Michael Carter and Rodney Maddock

The Economic Record, 1987, vol. 63, issue 2, 120-128

Abstract: We take a simple, well‐known macroeconomic model and treat it as a game between two players—the government and an all‐embracing union. The payoffs have the form of a prisoner's dilemma. The equilibrium outcome produces unwanted inflation and is not Pareto optimal. This is despite the fact that all participants are assumed to have full information. This result is shown to be quite robust to the form of the model and is not affected if one of the players is forced to announce its strategy in advance. This we call the invisible foot of macroeconomics.

Date: 1987
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https://doi.org/10.1111/j.1475-4932.1987.tb00644.x

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