Bank of Japan’s Monetary Policy to Work on Expectations: Game Theoretic Considerations

Abstract

From 2013 to 2022, the Bank of Japan tried and failed to achieve a two percent inflation target by influencing people’s inflation expectations. This study examines the difficulty in manipulating inflation expectations from a game theory perspective. When the expected rate of inflation is stable over a long period, it becomes common knowledge, and thus, a convention in David Lewis’s sense. Manipulating inflation expectations requires the manipulation of common knowledge, for which certain devices are necessary. As an example of successful common knowledge manipulation, we consider the Real Plan implemented in Brazil in 1994 and discuss its connection to narrative economics because one way to manipulate common knowledge is to create a narrative.