Inflationary Bias in a Simple Stochastic Economy

26 Pages Posted: 7 Nov 2001

See all articles by Ioannis Karatzas

Ioannis Karatzas

Columbia University - Department of Statistics

Martin Shubik

Yale University - School of Management; Yale University - Cowles Foundation

William D. Sudderth

University of Minnesota

John Geanakoplos

Yale University; Santa Fe Institute

Date Written: October 2001

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 Game, Control, Interest Rate, Central Bank, Equilibrium

JEL Classification: C7, C73, D81, E41, E58

Suggested Citation

Karatzas, Ioannis and Shubik, Martin and Sudderth, William D. and Geanakoplos, John D, Inflationary Bias in a Simple Stochastic Economy (October 2001). Available at SSRN: https://ssrn.com/abstract=289640

Ioannis Karatzas

Columbia University - Department of Statistics ( email )

Mail Code 4403
2990 Broadway, Room 618
New York, NY 10027
United States
212-854-3177 (Phone)
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Martin Shubik (Contact Author)

Yale University - School of Management ( email )

Box 208200
New Haven, CT 06520-8200
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
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HOME PAGE: http://cowles.econ.yale.edu/P/au/d_shubik.htm

William D. Sudderth

University of Minnesota ( email )

206 Church St SE
313 Ford Hall
Minneapolis, MN 55455-8868
United States
612-625-2801 (Phone)
612-624-8868 (Fax)

John D Geanakoplos

Yale University ( email )

30 Hillhouse Avenue
New Haven, CT 06511
United States
203-432-3397 (Phone)

HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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