To Be Better off: Some lllustrations TRigger Strategy: By the Folk Theorem. the best outcome can be an 9 0 equilibrium if the discount rate is sufficiently low in a infinite horizon model(how about finite horizon?) A possible strategy x2=0∥x1-1==1 F otherwise One can check that ifF and B are sufficiently large, zero inflation will be a subgame perfect equilibrium Note the concept of perfection: you not only need to check deviations from the equilibrium path, but also need to check zero k inflation is the best response of government along off-equilibrium path WeakneSs: How to select an equilibrium from so many possible candidates? This is a F typical problem in game theoryTo Be Better Off: Some Illustrations ❖ Trigger Strategy: By the Folk Theorem, the best outcome can be an equilibrium if the discount rate is sufficiently low in a infinite horizon model (how about finite horizon?). ❖ A possible strategy: F otherwise if e t e t t e t = = − = −   0  1  1 • One can check that if F and β are sufficiently large, zero inflation will be a subgame perfect equilibrium. • Note the concept of perfection: you not only need to check deviations from the equilibrium path, but also need to check zero inflation is the best response of government along off-equilibrium path. • Weakness: How to select an equilibrium from so many possible candidates? This is a typical problem in game theory