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Firms’ rational expectations, workers’ psychology, and monetary policy in a behavioral real business cycle model

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  • Soldatos, Gerasimos T.
  • Varelas, Erotokritos

Abstract

This paper is based on cognitive psychology’s view of “curvilinear” optimism–pessimism and hence, contains a flavor of behavioral macroeconomics. The substructure of a real overlapping-generations business cycle model is assumed to be underlined by the long-term character of firms’ rational expectations. This model is combined with the workers’ “bell-shaped” optimism–pessimism about a fractional-reserve-banking economy. An exogenous shock will be propagated through this workers’ psychology. Policy-wise, the public sector is ignored and the only purpose of the monetary authority is to secure the efficiency of intergenerational income distribution in a business environment with zero full-employment general-equilibrium profit. Within this context, monetary policy is found to be in the spirit of the Old Chicago quantity theory in that monetary expansion is anti-recessionary, and the increase of the reserve ratio is shown to be anti-inflationary. It is a viewpoint with Chartalist flavor.

Suggested Citation

  • Soldatos, Gerasimos T. & Varelas, Erotokritos, 2017. "Firms’ rational expectations, workers’ psychology, and monetary policy in a behavioral real business cycle model," Economic Analysis and Policy, Elsevier, vol. 53(C), pages 129-139.
    • Handle: RePEc:eee:ecanpo:v:53:y:2017:i:c:p:129-139
    DOI: 10.1016/j.eap.2017.01.003
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    Cited by:

    1. Halkos, George & Bousinakis, Dimitrios, 2017. "The effect of stress and dissatisfaction on employees during crisis," Economic Analysis and Policy, Elsevier, vol. 55(C), pages 25-34.

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    More about this item

    Keywords

    Curvilinear mood; Economic activity; Monetary expansion; Old Chicago quantity theory; Chartalism;
    All these keywords.

    JEL classification:

    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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