State Manipulation and Asymptotic Inefficiency in a Dynamic Model of Monetary Policy

Publikation: Working paperForskning

A simple folk theorem of repeated games states that Pareto-efficient outcomes can be achieved in a perfect equilibrium where deviations are punished by a reversion to Nash equilibrium of the associated stage game (Nash threats equilibrium), provided that players are sufficiently patient. In a dynamic version of a well-known monetary policy game we show that such asymptotic efficiency may not be possible, as the presence of a state variable introduces the possibility of state manipulation. Moreover, the lowest inflation rate in Nash threats equilibrium may be increasing as players become more patient
OriginalsprogEngelsk
Udgivelses stedUniversities of Copenhagen and Warwick
Antal sider17
StatusUdgivet - 2000

ID: 50678430