Evaluation of Strategic Dynamics of Inflation Control: A Game-Theoretic Exploration

The issue of why Japan had always experienced deflation since approximately 20 years ago has made the whole society depressed and, actually or potentially, it is worthwhile employing game theory as a critical analytical tool to examine the strategic interactions among key economic agents. Despite numerous interventions, such as inappropriate fiscal stimulus and aggressive monetary easing, Japan's economy is continuously under deflationary pressures. This persistent economic dilemma is probably driven by structural impediments, including demographic ageing and the lack of effective coordination between fiscal and monetary policies which are of more significance than conventional policies. Therefore, the analysis is surrounded by several theoretical models, such as the Kydland-Prescott Model of Time Inconsistency, the Barro-Gordon Model of Inflationary Bias, and the Stackelberg Leadership Model, which collectively elucidates the challenges of maintaining inflation stability and the inherent limitations of existing policies. The findings reveal that strategic coordination between the government, central bank, businesses, and households has led to suboptimal policy outcomes which may reinforce a deflationary spiral. By achieving a bright economic prospect, Japan could enhance its financial resilience break the virtuous circle from the past and aim at sustainable growth and social stability in the future.