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Bounded rationality and parameters’ uncertainty in a simple monetary policy model

  • Domenico Colucci

    ()

    (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)

  • Vincenzo Valori

    ()

    (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)

We 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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File URL: http://www.disei.unifi.it/upload/sub/pubblicazioni/repec/flo/workingpapers/storicodimad/2012/dimadwp2012-03.pdf
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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Mathematical Economics with number 2012-03.

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Length: 14 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:flo:wpaper:2012-03
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  1. Domenico Colucci & Vincenzo Valori, 2005. "Ways of learning in a simple economic setting: a comparison," Working Papers - Mathematical Economics 2005-01, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  3. Domenico Colucci & Vincenzo Valori, 2006. "Asset price dynamics when behavioural heterogeneity varies," Working Papers - Mathematical Economics 2006-01, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  4. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  5. Colucci, Domenico & Valori, Vincenzo, 2011. "Adaptive expectations and cobweb phenomena: Does heterogeneity matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1307-1321, August.
  6. Daniel L. Thornton, 2012. "How did we get to inflation targeting and where do we need to go to now? a perspective from the U.S. experience," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 65-81.
  7. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  8. Bischi, Gian-Italo & Marimon, Ramon, 2001. "Global Stability Of Inflation Target Policies With Adaptive Agents," Macroeconomic Dynamics, Cambridge University Press, vol. 5(02), pages 148-179, April.
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