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Monetary Neutrality under Evolutionary Dominance of Bounded Rationality

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  • Gilberto Tadeu Lima

    ()

  • Jaylson Jair da Silveira

    ()

Abstract

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.

Suggested Citation

  • Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2013. "Monetary Neutrality under Evolutionary Dominance of Bounded Rationality," Working Papers, Department of Economics 2013_03, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2013wpecon3
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    File URL: http://onlinelibrary.wiley.com/doi/10.1111/ecin.12195/abstract
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    References listed on IDEAS

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    Cited by:

    1. Gilberto Tadeu Lima & Jaylson Jair da Silveira, 2018. "Macrodynamic Implications of Employee Profit Sharing as Effort Elicitation Device," Working Papers, Department of Economics 2018_02, University of São Paulo (FEA-USP).

    More about this item

    Keywords

    boundedly rational innatentiveness; evolutionary dynamics; monetary neutrality;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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