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Inflation: The Invisible Foot of Macroeconomics *
Author(s) -
CARTER MICHAEL,
MADDOCK RODNEY
Publication year - 1987
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1987.tb00644.x
Subject(s) - economics , inflation (cosmology) , outcome (game theory) , dilemma , pareto principle , simple (philosophy) , foot (prosody) , mathematical economics , keynesian economics , operations management , philosophy , physics , linguistics , epistemology , theoretical physics
We take a simple, well‐known macroeconomic model and treat it as a game between two players—the government and an all‐embracing union. The payoffs have the form of a prisoner's dilemma. The equilibrium outcome produces unwanted inflation and is not Pareto optimal. This is despite the fact that all participants are assumed to have full information. This result is shown to be quite robust to the form of the model and is not affected if one of the players is forced to announce its strategy in advance. This we call the invisible foot of macroeconomics .