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Optimal Term Length for an Overconfident Central Banker

Author

Listed:
  • Etienne Farvaque

    () (Faculty of International Affairs, The University of Le Havre)

  • Norimichi Matsueda

    () (School of Economics, Kwansei Gakuin University)

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. Embedding them in a standard New Keynesian framework, we derive 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 be lengthened when these two types of biases increase concurrently.

Suggested Citation

  • Etienne Farvaque & Norimichi Matsueda, 2013. "Optimal Term Length for an Overconfident Central Banker," Discussion Paper Series 106, School of Economics, Kwansei Gakuin University, revised Jun 2013.
  • Handle: RePEc:kgu:wpaper:106
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    References listed on IDEAS

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    More about this item

    Keywords

    central banker; overcon dence; legal mandate; optimal term length;

    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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