The Inflation Game

TL;DR

This paper models a game where households convert assets into consumption to avoid inflation, revealing multiple equilibria and showing that certain asset prices can predict overall inflation trends.

Contribution

It introduces a novel game-theoretic framework for understanding inflation dynamics and asset prices as indicators of inflation expectations.

Findings

Multiple inflation equilibria exist at intermediate money supplies.

Long-lived asset prices predict broader inflation trends.

Moderate inflation equilibria are unattainable, influencing policy targets.

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.