Inflationary Bias in a Simple Stochastic Economy

Ioannis Karatzas, Martin Shubik, William D. Sudderth and John Geanakoplos ()
Additional contact information
Ioannis Karatzas: Columbia University
William D. Sudderth: University of Minnesota
John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos

No 1333, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We construct explicit equilibria for strategic market games used to model an economy with fiat money, one nondurable commodity, countably many time- periods, and a continuum of agents. The total production of the commodity is a random variable that fluctuates from period to period. In each period, the agents receive equal endowments of the commodity, and sell them for cash in a market; their spending determines, endogenously, the price of the commodity. All agents have a common utility function, and seek to maximize their expected total discounted utility from consumption. Suppose an outside bank sets an interest rate rho for loans and deposits. If 1 + rho is the reciprocal of the discount factor, and if agents must bid for consumption in each period before knowing their income, then there is no inflation. However, there is an inflationary trend if agents know their income before bidding. We also consider a model with an active central bank, which is both accurately informed and flexible in its ability to change interest rates. This, however, may not be sufficient to control inflation.

Keywords: Inflation; strategic market games; control; interest rate; central bank; equilibrium (search for similar items in EconPapers)
JEL-codes: C7 C73 D81 E41 E58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2001-10
New Economics Papers: this item is included in nep-ent and nep-net
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Citations: View citations in EconPapers (1)

Published in Economic Theory (August 2006), 28(3): 481-512

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Working Paper: Inflationary Bias in a Simple Stochastic Economy (2001)
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