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

Yasushi Asako () and Tatsushi Okuda

No 17-E-03, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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' and workers' 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' 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.

Keywords: Target inflation rate; Evolutionary game; Best-response dynamics; Perfect-foresight dynamics; Multiple long-run equilibria; Capital-skill complementarity; Demand-creating innovation (search for similar items in EconPapers)
JEL-codes: C72 C73 E31 E52 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-evo, nep-gth and nep-mac
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