Bayes correlated equilibrium and inflationary bias
Policy implications and broad economic impacts of BCE
Fig.3 (EA cumulative utility) illustrates how the adaptive expectations mechanism, facilitated by the BCE framework, allows EAs to adjust their inflation expectations more precisely. This closer alignment of expectations with actual inflation under BCE limits inflationary bias, which can otherwise lead to suboptimal consumption and investment behaviours. The ability of EAs to update their expectations based on reliable signals reduces the economic disruptions that typically arise from misaligned inflation perceptions. Fig.2 , which details the inflation and unemployment dynamics, reveals that BCE not only stabilizes these key economic indicators but also enhances the predictability of economic conditions. This predictability is necessary for both the CB and EAs to make informed decisions that align with the actual economic landscape, rather than reacting to skewed perceptions or volatile market signals. In the BCE scenario (paradigm 1 in Fig.3 ), the alignment of CB and EA strategies leads to optimized utility paths, demonstrating the effectiveness of cooperative behaviour in economic policy execution. The CB’s role in this process is pivotal as it issues policy signals that are important in guiding EA behaviours towards actions that may limit inflationary bias and stabilize the economy. Additionally, the optimized utility paths obtained for both agents is crucial for BCE to be achieved considering agents must have no incentive to deviate unilaterally from their original strategy.
Conclusion
Our aim was to expose the emergence of inflationary bias as a result of time inconsistency. Solution proposals from a range of economic literature were brought forward, revealing the problems rooted in their methodology, leading to our own proposal. Here, we prove BCE can derive an optimum set of monetary policies that lower inflationary biases arising from time inconsistency, promoting mutually beneficial scenarios for both agents (CB and EAs) of the game. We show that policy effectiveness can increase drastically through the coordination of CB operations with anticipatory expectations of EAs using a range of theoretical economic frameworks and stochastic empirical experiments. Our empirical investigations confirm the pre-eminence of BCE-guided strategies over the traditional non-BCE methodologies, using a stochastic modelling approach. The result supports our proposal: if BCE principles are observed, it contributes to the weakening of inflation volatility, and creates favourable ground for maintaining equilibria and economic stability. The demonstrated efficacy of BCE in aligning policy instruction with the rational expectations theory, therefore, showcases its practical applications in the real-time orchestration of monetary policy. This alignment is pivotal in achieving consistent economic growth and equilibrium. It helps in diminishing time inconsistencies and policy-induced economic fluctuations. If we contemplate the future trajectory of monetary policy design and implementation, a strong case can be made for the elevation of BCE from a theoretical dynamic to a central role in economic policymaking. Possible extensions of this paper could include a model that tests the stability of these results in real world scenarios with empirical data, ensuring that the constraints of the model are adhered to when subjected to actual economic behaviours and policies.
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