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Monetary Neutrality under Evolutionary Dominance of Bounded Rationality

  • Gilberto Tadeu Lima

    ()

  • Jaylson Jair da Silveira

    ()

We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non-updated information and establish a lagged optimal price (bounded rationality strategy). We devise an evolutionary micro-dynamics (with and without mutation) that, by interacting to the dynamics of the aggregate variables, determines the co-evolution of the frequency distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, the evolutionary learning dynamics takes the information-updating process to a long-run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and monetary shocks have persistent, though not permanent, impacts on real output.

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File URL: http://onlinelibrary.wiley.com/doi/10.1111/ecin.12195/abstract
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Paper provided by University of São Paulo (FEA-USP) in its series Working Papers, Department of Economics with number 2013_03.

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Date of creation: 20 Feb 2013
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Handle: RePEc:spa:wpaper:2013wpecon3
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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  2. Sethi, Rajiv & Franke, Reiner, 1995. "Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation," Economic Journal, Royal Economic Society, vol. 105(430), pages 583-600, May.
  3. Luis J. Álvarez & Emmanuel Dhyne & Marco M. Hoeberichts & Claudia Kwapil & Hervé le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2005. "Sticky prices in the euro area: a summary of new micro evidence," Banco de Espa�a Working Papers 0542, Banco de Espa�a.
  4. Gilles Saint-Paul, 2005. "Some Evolutionary Foundations for Price Level Rigidity," American Economic Review, American Economic Association, vol. 95(3), pages 765-779, June.
  5. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
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  7. Moscarini, Giuseppe, 2004. "Limited information capacity as a source of inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2003-2035, September.
  8. Droste, Edward & Hommes, Cars & Tuinstra, Jan, 2002. "Endogenous fluctuations under evolutionary pressure in Cournot competition," Games and Economic Behavior, Elsevier, vol. 40(2), pages 232-269, August.
  9. Peter J. Klenow & Benjamin A. Malin, 2010. "Microeconomic Evidence on Price-Setting," NBER Working Papers 15826, National Bureau of Economic Research, Inc.
  10. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  11. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  13. Ricardo Reis, 2005. "Inattentive Producers," 2005 Meeting Papers 290, Society for Economic Dynamics.
  14. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
  15. Ball, Laurence & Romer, David, 1989. "Are Prices Too Sticky?," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 507-24, August.
  16. Phelps, Edmund S, 1969. "The New Microeconomics in Inflation and Employment Theory," American Economic Review, American Economic Association, vol. 59(2), pages 147-60, May.
  17. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  18. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
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