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The psychology of inflation, monetary policy and macroeconomic instability

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  • Gaffeo, Edoardo
  • Canzian, Giulia

Abstract

This paper extends a stylized AD/AS macroeconomic model to a setting in which inflation dynamics impinges on the sentiment of the public toward the future course of the economy. As individuals are allowed to exchange information on their personal mood and to persuade each other through repeated interactions, waves of optimism and pessimism emerge endogenously. The model is then used to analyze the stabilizing effect of alternative monetary policy rules.

Suggested Citation

  • Gaffeo, Edoardo & Canzian, Giulia, 2011. "The psychology of inflation, monetary policy and macroeconomic instability," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 660-670.
  • Handle: RePEc:eee:soceco:v:40:y:2011:i:5:p:660-670
    DOI: 10.1016/j.socec.2011.05.005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zeev Kril & David Leiser & Avia Spivak, 2016. "What Determines the Credibility of the Central Bank of Israel in the Public Eye?," International Journal of Central Banking, International Journal of Central Banking, vol. 12(1), pages 67-93, March.
    2. Phiri, Andrew, 2017. "Inflation persistence in BRICS countries: A quantile autoregressive (QAR) model," MPRA Paper 79956, University Library of Munich, Germany.
    3. Andrew Phiri, 2017. "Inflation persistence in BRICS countries: A quantile autoregressive (QAR) approach," Working Papers 1702, Department of Economics, Nelson Mandela University, revised Jul 2017.
    4. Dixon, R. & Griffiths, W. & Lim, G.C., 2014. "Lay people’s models of the economy: A study based on surveys of consumer sentiments," Journal of Economic Psychology, Elsevier, vol. 44(C), pages 13-20.
    5. Pierdzioch, Christian & Reid, Monique B. & Gupta, Rangan, 2016. "Inflation forecasts and forecaster herding: Evidence from South African survey data," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 62(C), pages 42-50.
    6. Elisa Darriet & Sacha Bourgeois-Gironde, 2015. "Why lay social representations of the economy should count in economics," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 14(2), pages 245-258, November.

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