Learning, inflation, and the Phillips Curve

Abstract

The Replicator Dynamics of Evolutionary Game Theory is introduced in a closed economy so as to model how a continuum of firms evolve over time with respect to the pricing strategies. Incorporation- of Replicator Dynamics facilitates modelling microeconomic frictions that lead to a Phillips Curve on the macroeconomic level. I'he firms are boundedly rational players which are learning, and are apt to make mistakes. Mistakes function as a mutation process and prevent a strategy from becoming extinct. An arbitrary non-empty set of consumers face a cash-in-advance constraint and total consumption spending is symmetrically affected by changes in growth rate of money supply which is stochastic. Using a discrete price set, we introduce heterogeneity of firm behaviour in a single homogenous good market. The economy is simulated ibr a large number of finitely many time periods. A Phillips Curve type linkage between infiation and output is recognized at stationary states. The slope of the Phillips Curve is observed to increase as mean of money growth rate gets higher or as the uncertainty in money growth rate is increased. Slope of the Phillips Curve diminishes as price stickiness is intensified by either reducing the mistake level or by increasing the firms' responsiveness to relative payoff realizations.