Optimal Monetary Policy And Bounded Rationality
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Author |
: Jonathan Benchimol |
Publisher |
: International Monetary Fund |
Total Pages |
: 52 |
Release |
: 2019-08-02 |
ISBN-10 |
: 9781513511344 |
ISBN-13 |
: 1513511343 |
Rating |
: 4/5 (44 Downloads) |
Synopsis Optimal Monetary Policy Under Bounded Rationality by : Jonathan Benchimol
The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.
Author |
: Stefano Eusepi |
Publisher |
: |
Total Pages |
: 0 |
Release |
: 2002 |
ISBN-10 |
: OCLC:1375597448 |
ISBN-13 |
: |
Rating |
: 4/5 (48 Downloads) |
Synopsis Optimal Monetary Policy and Bounded Rationality by : Stefano Eusepi
It is widely recognised that the market and the monetary authorities face a high degree of uncertainty about the appropriate models to use for policy decisions and forecasting. This paper reviews the main theoretical results of the literature on bounded rationality and discusses the implications for the design of optimal policy rules. In the final section, we propose an original method to evaluate policy rules that are 'robust' to uncertainty about the expectation formation process.
Author |
: Xavier Gabaix |
Publisher |
: |
Total Pages |
: 55 |
Release |
: 2016 |
ISBN-10 |
: OCLC:966430221 |
ISBN-13 |
: |
Rating |
: 4/5 (21 Downloads) |
Synopsis A Behavioral New Keynesian Model by : Xavier Gabaix
This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or \helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduce its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model helps solve the “forward guidance puzzle”: the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation: because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands “nominal GDP targeting”; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic forms. (vi) The model is “neo-Fisherian” in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by the empirical evidence.
Author |
: Giuseppe Ferrero |
Publisher |
: |
Total Pages |
: 88 |
Release |
: 2004 |
ISBN-10 |
: UVA:X004853719 |
ISBN-13 |
: |
Rating |
: 4/5 (19 Downloads) |
Synopsis Monetary Policy and the Transition to Rational Expectations by : Giuseppe Ferrero
Author |
: Richard T. Froyen |
Publisher |
: Edward Elgar Publishing |
Total Pages |
: 341 |
Release |
: 2008-01-01 |
ISBN-10 |
: 9781847208644 |
ISBN-13 |
: 1847208649 |
Rating |
: 4/5 (44 Downloads) |
Synopsis Optimal Monetary Policy Under Uncertainty by : Richard T. Froyen
Froyen and Guender have provided a thorough and careful analysis of optimal monetary policy over most of the range of theoretical models that have been used in modern macroeconomics. By providing a comprehensive and clear comparative framework they will help the student of monetary policy understand why there have been conflicting views of what policy makers should do. Central Banking In Optimal Monetary Policy Under Uncertainty, academicians and economists Richard T. Froyen and Alfred V. Guender have collaborated on presenting an informed and informative survey of optimal monetary policy literature arising during the 1970s and 1980s as a ground work for understanding current market and other economic influences on such germane issues as discretion versus commitment, target versus instrument rules, and the delegation of policy making authority within the private and public sectors. With meticulous attention to scholarship and objectivity. . . Optimal Monetary Policy Under Uncertainty is a thoughtful and thought-provoking body of work that is very strongly recommended for professional, academic, corporate and governmental economic reference collections and supplemental reading lists. Midwest Book Review Recently there has been a resurgence of interest in the study of optimal monetary policy under uncertainty. This book provides a thorough survey of the literature that has resulted from this renewed interest. The authors ground recent contributions on the science of monetary policy in the literature of the 1970s, which viewed optimal monetary policy as primarily a question of the best use of information, and studies in the 1980s that gave primacy to time inconsistency problems. This broad focus leads to a better understanding of current issues such as discretion versus commitment, target versus instrument rules, and the merits of delegation of policy authority. Casting a wide net, the authors survey the recent literature on the New Keynesian approach to optimal monetary policy in the context of the earlier literature. They emphasize the relationship between policy decisions and the information set available to the policymaker, a central focus of the earlier literature, obscured in much recent work. Optimal policy questions are considered in open as well as closed economy models and the often confusing terminology in the literature is sorted and clarified. Questions are considered within easily analysed models and the authors clearly show why these models lead to different (or equivalent) policy conclusions. Recent policy issues such as desirability of inflation targeting and the relative merits of target versus instrument rules are covered in detail. Economists in academia and in policymaking organizations who want to learn about recent developments in the area of optimal monetary policy, as well as graduate and advanced undergraduate students in macroeconomic and monetary economics, will find this volume a clear and thorough examination of the topic.
Author |
: Ran Spiegler |
Publisher |
: OUP USA |
Total Pages |
: 235 |
Release |
: 2011-02-18 |
ISBN-10 |
: 9780195398717 |
ISBN-13 |
: 0195398718 |
Rating |
: 4/5 (17 Downloads) |
Synopsis Bounded Rationality and Industrial Organization by : Ran Spiegler
Ît then rigorously analyses each model in the tradition of microeconomic theory, leading to a richer, more realistic picture of consumer behavior. Ran Spiegler analyses phenomena such as exploitative price plans in the credit market, complexity of financial products and other obfuscation practices, consumer antagonism to unexpected price increases, and the role of default options in consumer decision making. Spiegler unifies the relevant literature into three main strands: limited ability to anticipate and control future choices, limited ability to understand complex market environments, and sensitivity to reference points. Although the challenge of enriching the psychology of decision makers in economic models has been at the frontier of theoretical research in the last decade, there has been no graduate-level, theory-oriented textbook to cover developments in the last 10-15 years.
Author |
: Francisco Ilabaca |
Publisher |
: |
Total Pages |
: |
Release |
: 2019 |
ISBN-10 |
: OCLC:1158577508 |
ISBN-13 |
: |
Rating |
: 4/5 (08 Downloads) |
Synopsis Bounded Rationality, Monetary Policy, and Macroeconomic Stability by : Francisco Ilabaca
This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes "cognitive discounting", i.e., consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy.
Author |
: Peter N. Ireland |
Publisher |
: |
Total Pages |
: 9 |
Release |
: 2015 |
ISBN-10 |
: OCLC:1308389470 |
ISBN-13 |
: |
Rating |
: 4/5 (70 Downloads) |
Synopsis Irrational Expectations and Econometric Practice Discussion of Orphanides and Williams, 'Inflation Scares and Forecast-Based Monetary Policy' by : Peter N. Ireland
Athanasios Orphanides and John C. Williams' excellent conference paper, “Inflation Scares and Forecast-Based Monetary Policy,” contributes importantly to the new and rapidly growing branch of the literature on bounded rationality and learning in macroeconomics. Their paper, like many others, derives interesting and useful theoretical results that show how the introduction of bounded rationality and learning impacts on the effects of monetary policy shocks and the characteristics of optimal monetary policy rules. This note suggests that some additional empirical work -- some “irrational expectations econometrics,” if you will -- might serve to make these purely theoretical results seem more relevant and convincing.
Author |
: Paul De Grauwe |
Publisher |
: CEPS |
Total Pages |
: 22 |
Release |
: 2008 |
ISBN-10 |
: 9789290798194 |
ISBN-13 |
: 929079819X |
Rating |
: 4/5 (94 Downloads) |
Synopsis Stock Prices and Monetary Policy by : Paul De Grauwe
The question of whether central banks should target stock prices so as to prevent bubbles and crashes from occurring has been hotly debated. This paper analyses this question using a behavioural macroeconomic model. This model generates bubbles and crashes. It analyses how 'leaning against the wind' strategies, which aim to reduce the volatility of stock prices, can help in reducing volatility of output and inflation. We find that such policies can be effective in reducing macroeconomic volatility, thereby improving the trade-off between output and inflation variability. The strength of this result, however, depends on the degree of credibility of the inflation-targeting regime. In the absence of such credibility, policies aiming at stabilising stock prices do not stabilise output and inflation.
Author |
: Kurt Weyland |
Publisher |
: Princeton University Press |
Total Pages |
: 313 |
Release |
: 2009-02-09 |
ISBN-10 |
: 9781400828067 |
ISBN-13 |
: 1400828066 |
Rating |
: 4/5 (67 Downloads) |
Synopsis Bounded Rationality and Policy Diffusion by : Kurt Weyland
Why do very different countries often emulate the same policy model? Two years after Ronald Reagan's income-tax simplification of 1986, Brazil adopted a similar reform even though it threatened to exacerbate income disparity and jeopardize state revenues. And Chile's pension privatization of the early 1980s has spread throughout Latin America and beyond even though many poor countries that have privatized their social security systems, including Bolivia and El Salvador, lack some of the preconditions necessary to do so successfully. In a major step beyond conventional rational-choice accounts of policy decision-making, this book demonstrates that bounded--not full--rationality drives the spread of innovations across countries. When seeking solutions to domestic problems, decision-makers often consider foreign models, sometimes promoted by development institutions like the World Bank. But, as Kurt Weyland argues, policymakers apply inferential shortcuts at the risk of distortions and biases. Through an in-depth analysis of pension and health reform in Bolivia, Brazil, Costa Rica, El Salvador, and Peru, Weyland demonstrates that decision-makers are captivated by neat, bold, cognitively available models. And rather than thoroughly assessing the costs and benefits of external models, they draw excessively firm conclusions from limited data and overextrapolate from spurts of success or failure. Indications of initial success can thus trigger an upsurge of policy diffusion.