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The Inflation Game

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  • Wolfgang Kuhle

Abstract

We study a game where households convert paper assets, such as money, into consumption goods, to preempt inflation. The game features a unique equilibrium with high (low) inflation, if money supply is high (low). For intermediate levels of money supply, there exist multiple equilibria with either high or low inflation. Equilibria with moderate inflation, however, do not exist, and can thus not be targeted by a central bank. That is, depending on agents' equilibrium play, money supply is always either too high or too low for moderate inflation. We also show that inflation rates of long-lived goods, such as houses, cars, expensive watches, furniture, or paintings, are a leading indicator for broader, economy wide, inflation.

Suggested Citation

  • Wolfgang Kuhle, 2021. "The Inflation Game," Papers 2112.14697, arXiv.org.
    • Handle: RePEc:arx:papers:2112.14697
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    References listed on IDEAS

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    1. Blanchard, Olivier J, 1979. "Backward and Forward Solutions for Economies with Rational Expectations," American Economic Review, American Economic Association, vol. 69(2), pages 114-118, May.
    2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    3. Stephen J. DeCanio, 1979. "Rational Expectations and Learning from Experience," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(1), pages 47-57.
    4. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695.
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    Cited by:

    1. Kujtim Avdiu & Stephan Unger, 2022. "Predicting Inflation—A Holistic Approach," JRFM, MDPI, vol. 15(4), pages 1-14, March.

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