SOCIAL NORMS, INFLATION AND STABILIZATION

Abstract

This study presents a socio-economic game of inflation and distributive conflict where inflation is derived from, and stabilization is implemented via, social norms. We apply the `Theory of Social Situations' (Greenberg 1990) to contrast rational choice outcomes predicted by Nash equilibrium vs those derived as social norms under our normative criteria (von Neumann-Morgenstern stability). We then analyze `heterodox' stabilization policies, which seek to address both the economic and sociological criteria for stabilization. Our conclusion is that social pacts constitute a viable normative approach to stabilization because they address the social conflict underlying chronic inflation in order to derive stabilizing norms.