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Optimal Term Length for an Overconfident Central Banker

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  • Etienne Farvaque

    ()
    (Faculty of International Affairs, The University of Le Havre)

  • Norimichi Matsueda

    ()
    (School of Economics, Kwansei Gakuin University)

Abstract

This paper discusses the implications of overconfidence when it affects a monetary policy-maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Embedding them in a standard New Keynesian framework, we derive the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should be lengthened when these two types of biases increase concurrently.

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File URL: http://192.218.163.163/RePEc/pdf/kgdp106.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 106.

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Length: 15 pages
Date of creation: Jun 2013
Date of revision: Jun 2013
Handle: RePEc:kgu:wpaper:106

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Keywords: central banker; overcon dence; legal mandate; optimal term length;

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  1. Axel Dreher & Jan-Egbert Sturm & Jakob de Haan, 2007. "Does High Inflation Cause Central Bankers to Lose Their Job? Evidence Based on a New Data Set," KOF Working papers 07-167, KOF Swiss Economic Institute, ETH Zurich.
  2. Xiang Lin, 1999. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths: Comment," American Economic Review, American Economic Association, vol. 89(4), pages 1056-1062, September.
  3. Christopher Crowe & Ellen E. Meade, 2007. "The Evolution of Central Bank Governance around the World," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 69-90, Fall.
  4. Dreher, Axel & Sturm, Jan-Egbert & Haan, Jakob de, 2010. "When is a central bank governor replaced? Evidence based on a new data set," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 766-781, September.
  5. Claussen, Carl Andreas & Matsen, Egil & Røisland, Øistein & Torvik, Ragnar, 2012. "Overconfidence, monetary policy committees and chairman dominance," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 699-711.
  6. Waller, Christopher J & Walsh, Carl E, 1996. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths," American Economic Review, American Economic Association, vol. 86(5), pages 1139-53, December.
  7. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, December.
  8. Axilrod, Stephen H., 2011. "Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262015625, December.
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