Optimal Term Length for an Overconfident Central Banker
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.
|Date of creation:||Jun 2013|
|Date of revision:||Jun 2013|
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Web page: http://www-econ.kwansei.ac.jp/~econ/index_e.html
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"Overconfidence, Monetary Policy Committees and Chairman Dominance,"
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- Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770.
- Christopher Crowe & Ellen E. Meade, 2007. "The Evolution of Central Bank Governance around the World," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 69-90, Fall.
- Xiang Lin, 1999. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths: Comment," American Economic Review, American Economic Association, vol. 89(4), pages 1056-1062, September.
- Axilrod, Stephen H., 2011. "Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262015625.
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