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Optimal term length for an overconfident central banker

Author

Listed:
  • Etienne Farvaque

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Norimichi Matsueda

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. Incorporating them into a standard New Keynesian framework, we consider 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 always be lengthened when these two types of biases increase by the same percentage magnitude.

Suggested Citation

  • Etienne Farvaque & Norimichi Matsueda, 2017. "Optimal term length for an overconfident central banker," Post-Print hal-01533519, HAL.
    • Handle: RePEc:hal:journl:hal-01533519
    DOI: 10.1142/s0217590816500107
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    Cited by:

    1. is not listed on IDEAS
    2. Hamza Bennani, 2018. "Media Perception of Fed Chair's Overconfidence and Market Expectations," Working Papers hal-04141795, HAL.

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    Keywords

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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