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Monetary Neutrality Under Evolutionary Dominance Of Bounded Rationality

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  • Gilberto Tadeu Lima
  • Jaylson Jair Silveira

Abstract

type="main" xml:id="ecin12195-abs-0001"> We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion that we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non-updated information and establish a lagged optimal price (bounded rationality strategy). We devise evolutionary microdynamics (with and without mutation) that, by interacting with the dynamics of the aggregate variables, determines the coevolution of the frequency distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, evolutionary learning dynamics take the information-updating process to a long-run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and the monetary shocks have persistent, although not permanent, impacts on real output . ( JEL E31, C73, D83)

Suggested Citation

  • Gilberto Tadeu Lima & Jaylson Jair Silveira, 2015. "Monetary Neutrality Under Evolutionary Dominance Of Bounded Rationality," Economic Inquiry, Western Economic Association International, vol. 53(2), pages 1108-1131, April.
  • Handle: RePEc:bla:ecinqu:v:53:y:2015:i:2:p:1108-1131
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    References listed on IDEAS

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    Cited by:

    1. Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2018. "Macrodynamic Implications of Employee Profit Sharing as Effort Elicitation Device," Working Papers, Department of Economics 2018_02, University of São Paulo (FEA-USP).

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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