An evolutionary theory of the convergence towards low inflation rates

Abstract

This paper presents an evolutionary interpretation of Barro-Gordon’s monetary policy game. The model describes a multi-country setup where governments and private agents are boundedly rational players. The behavioral rule of players’ decisions leads to the imitation of the strategy giving the highest payoff. In this evolutionary monetary policy game, we show how a low inflation state is reached from an international context dominated by inflationary policies. The analysis explains the convergence towards low inflation rates observed during the past twenty years. Moreover, the low inflation state appears to be the long-run equilibrium of the game under some conditions featuring the observed macroeconomic context.