Bounded rationality and parameters’ uncertainty in a simple monetary policy model
AbstractWe 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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Bibliographic InfoPaper provided by Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze in its series DiMaD Working Papers with number 2012-03.
Length: 14 pages
Date of creation: Feb 2012
Date of revision:
inflation targeting; monetary policy; adaptive expectations; heterogeneous agents;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-10 (All new papers)
- NEP-CBA-2012-04-10 (Central Banking)
- NEP-MAC-2012-04-10 (Macroeconomics)
- NEP-MON-2012-04-10 (Monetary Economics)
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