Information Equilibrium as an Economic Principle

44 Pages Posted: 6 Jan 2017

Date Written: October 8, 2015

Abstract

A general information equilibrium model in the case of ideal information transfer is defined and then used to derive the relationship between supply (information destination) and demand (information source) with the price as the detector of information exchange between demand and supply. We recover the properties of the traditional economic supply-demand diagram. Information equilibrium is then applied to macroeconomic problems, recovering some common macroeconomic models in particular limits like the AD-AS model, IS-LM model (in a low inflation limit), the quantity theory of money (in a high inflation limit) and the Solow-Swan growth model. Information equilibrium results in empirically accurate models of inflation and interest rates, and can be used to motivate a “statistical economics”, analogous to statistical mechanics for thermodynamics.

Keywords: Information Theory, Macroeconomics, Microeconomics

JEL Classification: C00, E10, E30, E40

Suggested Citation

Smith, Jason, Information Equilibrium as an Economic Principle (October 8, 2015). Available at SSRN: https://ssrn.com/abstract=2894072 or http://dx.doi.org/10.2139/ssrn.2894072

Jason Smith (Contact Author)

The Boeing Company ( email )

United States

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