Rational expectations, income policies and game theory

Abstract

Rational expectations are viewed as a Nash equilibrium of a game. If a change of regime occurs, it is argued that it is very unlikely that the economy is going to achieve the new equlibrium at once. In fact, one can show that if the public acts prudently endogenous inflation inertia arises. Hence , at this point, government intervention by means of income's policies is required, in the sense that it guides the economy to the new equilibrium, much faster than the market. One also analyses, the effects of income's policies on a staggered wage setting.