Bayes correlated equilibrium and inflationary bias
Fig.2 presents the cumulative utility of the CB and EAs across two distinct paradigms. In paradigm 1 (P1, 0-50 months), a BCE environment, the utility paths for both agents appear optimized, ascending smoothly as they maximize their respective payoff functions. In the second paradigm (P2, 50-100 months), the absence of BCE introduces volatility into their utility functions, reflecting the ‘turbulence’ of navigating an economic landscape in the absence of complete information.
Fig.3 – Plot of the CB’s cumulative utility and the EAs cumulative utility respectively
BCE framework and limiting inflationary bias
Our dynamic game shows the CB and EAs interact in a way that directly impacts inflation management and economic stability. The CB’s utility function is geared towards minimizing deviation from targeted inflation levels 𝜋 ∗ , while EAs’ utility is closely tied to consumption 𝐶 , influenced by the alignment of their inflation expectations 𝜋 with actual inflation rates 𝜋 . Under the BCE framework seen in Fig.3 (EA cumulative utility ) when the CB’s policy signals 𝜎 are effectively communicated and aligned with actual economic conditions, they lead to an alignment of strategies between the CB and EAs. This reduces the inflationary bias that often results from discrepancies between expected inflation and actual inflation, thus enhancing overall economic stability. Fig.3 (CB cumulative utility) showcases the utility benefits in the BCE scenario, where coordinated agent responses lead to smoother utility trajectories and more predictable economic outcomes. In contrast, paradigm 2 of the simulation reveals the challenges of non-BCE scenarios where independent and randomly derived strategies result in greater utility volatility, particularly for EAs. This volatility underscores the importance of BCE in fostering a stable environment for optimal economic decision making. The stochastic nature of inflation and unemployment, modelled through an OU process shown in Fig.2 , demonstrates the inherent economic variability that agents need to manage. Under BCE, these dynamics are more contained, reflecting the systematic influence of coordinated policy actions on economic indicators.
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