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Bounded rationality and parameters’ uncertainty in a simple monetary policy model

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Author Info

  • Domenico Colucci

    () (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)

  • Vincenzo Valori

    () (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)

Abstract

We study a simple monetary model in which a central bank faces a boundedly rational private sector and has the goal of stabilizing inflation. The system’s dynamics is generated by the interaction of the expectations about inflation of the various agents involved. A modest degree of heterogeneity in such expectations is found to have interesting consequences, in particular when the central bank is uncertain about the relevant behavioral parameters. We find that a simple heuristic based on mean and variance of the distribution of behavioural parameters stabilizes the system for a wide parametric region.

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File URL: http://www.dmd.unifi.it/RePEc/flo/WorkingPapers/2012/DiMaDWP2012-03.pdf
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Bibliographic Info

Paper provided by Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze in its series DiMaD Working Papers with number 2012-03.

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Length: 14 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:flo:wpaper:2012-03

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Related research

Keywords: inflation targeting; monetary policy; adaptive expectations; heterogeneous agents;

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  1. Colucci, Domenico & Valori, Vincenzo, 2011. "Adaptive expectations and cobweb phenomena: Does heterogeneity matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1307-1321, August.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  3. Domenico Colucci & Vincenzo Valori, 2005. "Ways of learning in a simple economic setting: a comparison," DiMaD Working Papers 2005-01, Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze.
  4. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  5. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  6. Domenico Colucci & Vincenzo Valori, 2006. "Asset price dynamics when behavioural heterogeneity varies," DiMaD Working Papers 2006-01, Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze.
  7. Daniel L. Thornton, 2012. "How did we get to inflation targeting and where do we need to go to now? a perspective from the U.S. experience," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 65-81.
  8. Bischi, Gian-Italo & Marimon, Ramon, 2001. "Global Stability Of Inflation Target Policies With Adaptive Agents," Macroeconomic Dynamics, Cambridge University Press, vol. 5(02), pages 148-179, April.
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