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A Viable Solution to a Small Open-Economy Monetary Policy Problem

  • Jacek B. Krawczyk

    (Victoria University of Wellington)

  • Kunhong Kim

    (Victoria University of Wellington)

In some real-life intertemporal decision problems, which include a country's central-bank interest-rate determination problem, optimisation might be an unsuitable solution procedure in that it suggests a unique ``optimal'' solution for problems where many solutions could be "satisficing". This claim is in line with Herbert A. Simon's (1978 Economics Nobel Prize laureate) postulate that the economists need "satisficing" (his neologism) rather than "optimising" solutions. We aim to use viability theory that rigorously captures the essence of satisficing to study a monetary policy problem. The latter is defined as a qualitative game between a central bank, which wants to keep inflation under control and an ``evil" agent that represents the foreign exchange rate impact on the local economy. We show that satisficing adjustment rules can be endogenously obtained

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 188.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:188
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