A Game-Theoretical Interpretation of Inflation and Unemployment in Western Europe

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Abstract
The paper aims at a more complete, yet still parsimonious, explanation of macro-economic policy failure and success during the ‘stagflation’ period of the 1970s. Focusing on four countries, Austria, Great Britain, Sweden and West Germany, it is shown that both runaway inflation and rising unemployment could be avoided whenever it was possible to achieve a Keynesian concertation between fiscal and monetary expansion on the one hand and union wage restraint on the other. The actual policy experiences of the four countries are then explained in terms of the linkage between a ‘coordination game’ played between the government and the unions in which macro-economic outcomes are determined, and a politics game in which the government tries to anticipate the electoral responses of different voter strata to these outcomes.

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