Information equilibrium as an economic principle

TL;DR

This paper introduces an information equilibrium framework that models economic supply and demand, deriving traditional macroeconomic models and providing empirically accurate insights into inflation and interest rates.

Contribution

It develops a general information equilibrium model for ideal information transfer, unifying and deriving key macroeconomic models within a novel theoretical framework.

Findings

Recovering traditional supply-demand properties

Deriving macroeconomic models like AD-AS and IS-LM

Empirically accurate inflation and interest rate models

Abstract

A general information equilibrium model in the case of ideal information transfer is defined and then used to derive the relationship between supply (information destination) and demand (information source) with the price as the detector of information exchange between demand and supply. We recover the properties of the traditional economic supply-demand diagram. Information equilibrium is then applied to macroeconomic problems, recovering some common macroeconomic models in particular limits like the AD-AS model, IS-LM model (in a low inflation limit), the quantity theory of money (in a high inflation limit) and the Solow-Swan growth model. Information equilibrium results in empirically accurate models of inflation and interest rates, and can be used to motivate a 'statistical economics', analogous to statistical mechanics for thermodynamics.