Optimal Monetary Policy Under Bounded Rationality
Optimal Monetary Policy Under Bounded Rationality

Author: Jonathan Benchimol

Publisher: International Monetary Fund

Published: 2019-08-02

Total Pages: 52

ISBN-13: 1498324584

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The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.

Monetary Policy Rules
Monetary Policy Rules

Author: John B. Taylor

Publisher: University of Chicago Press

Published: 2007-12-01

Total Pages: 460

ISBN-13: 0226791262

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This timely volume presents the latest thinking on the monetary policy rules and seeks to determine just what types of rules and policy guidelines function best. A unique cooperative research effort that allowed contributors to evaluate different policy rules using their own specific approaches, this collection presents their striking findings on the potential response of interest rates to an array of variables, including alterations in the rates of inflation, unemployment, and exchange. Monetary Policy Rules illustrates that simple policy rules are more robust and more efficient than complex rules with multiple variables. A state-of-the-art appraisal of the fundamental issues facing the Federal Reserve Board and other central banks, Monetary Policy Rules is essential reading for economic analysts and policymakers alike.

Bounded Rationality and Industrial Organization
Bounded Rationality and Industrial Organization

Author: Ran Spiegler

Publisher: OUP USA

Published: 2011-02-18

Total Pages: 235

ISBN-13: 0195398718

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Ît then rigorously analyses each model in the tradition of microeconomic theory, leading to a richer, more realistic picture of consumer behavior. Ran Spiegler analyses phenomena such as exploitative price plans in the credit market, complexity of financial products and other obfuscation practices, consumer antagonism to unexpected price increases, and the role of default options in consumer decision making. Spiegler unifies the relevant literature into three main strands: limited ability to anticipate and control future choices, limited ability to understand complex market environments, and sensitivity to reference points. Although the challenge of enriching the psychology of decision makers in economic models has been at the frontier of theoretical research in the last decade, there has been no graduate-level, theory-oriented textbook to cover developments in the last 10-15 years.

Monetary Policy Strategies
Monetary Policy Strategies

Author: International Monetary Fund

Publisher: International Monetary Fund

Published: 1988-10-04

Total Pages: 28

ISBN-13: 1451952570

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The paper considers the merits of rules and discretion for monetary policy when the structure of the macroeconomic model and the probability distributions of disturbances are not well defined. It is argued that when it is costly to delay policy reactions to seldom-experienced shocks until formal algorithmic learning has been accomplished, and when time consistency problems are significant, a mixed strategy that combines a simple verifiable rule with discretion is attractive. The paper also discusses mechanisms for mitigating credibility problems and emphasizes that arguments against various types of simple rules lose their force under a mixed strategy.

Bounded Rationality
Bounded Rationality

Author: Sanjit Dhami

Publisher: MIT Press

Published: 2022-07-12

Total Pages: 553

ISBN-13: 0262369656

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Two leaders in the field explore the foundations of bounded rationality and its effects on choices by individuals, firms, and the government. Bounded rationality recognizes that human behavior departs from the perfect rationality assumed by neoclassical economics. In this book, Sanjit Dhami and Cass R. Sunstein explore the foundations of bounded rationality and consider the implications of this approach for public policy and law, in particular for questions about choice, welfare, and freedom. The authors, both recognized as experts in the field, cover a wide range of empirical findings and assess theoretical work that attempts to explain those findings. Their presentation is comprehensive, coherent, and lucid, with even the most technical material explained accessibly. They not only offer observations and commentary on the existing literature but also explore new insights, ideas, and connections. After examining the traditional neoclassical framework, which they refer to as the Bayesian rationality approach (BRA), and its empirical issues, Dhami and Sunstein offer a detailed account of bounded rationality and how it can be incorporated into the social and behavioral sciences. They also discuss a set of models of heuristics-based choice and the philosophical foundations of behavioral economics. Finally, they examine libertarian paternalism and its strategies of “nudges.”

Inflation Expectations
Inflation Expectations

Author: Peter J. N. Sinclair

Publisher: Routledge

Published: 2009-12-16

Total Pages: 402

ISBN-13: 1135179778

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Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

The Inflation-Targeting Debate
The Inflation-Targeting Debate

Author: Ben S. Bernanke

Publisher: University of Chicago Press

Published: 2007-11-01

Total Pages: 469

ISBN-13: 0226044734

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Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain. In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.

Bounded Rationality
Bounded Rationality

Author: Gerd Gigerenzer

Publisher: MIT Press

Published: 2002-07-26

Total Pages: 404

ISBN-13: 9780262571647

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In a complex and uncertain world, humans and animals make decisions under the constraints of limited knowledge, resources, and time. Yet models of rational decision making in economics, cognitive science, biology, and other fields largely ignore these real constraints and instead assume agents with perfect information and unlimited time. About forty years ago, Herbert Simon challenged this view with his notion of "bounded rationality." Today, bounded rationality has become a fashionable term used for disparate views of reasoning. This book promotes bounded rationality as the key to understanding how real people make decisions. Using the concept of an "adaptive toolbox," a repertoire of fast and frugal rules for decision making under uncertainty, it attempts to impose more order and coherence on the idea of bounded rationality. The contributors view bounded rationality neither as optimization under constraints nor as the study of people's reasoning fallacies. The strategies in the adaptive toolbox dispense with optimization and, for the most part, with calculations of probabilities and utilities. The book extends the concept of bounded rationality from cognitive tools to emotions; it analyzes social norms, imitation, and other cultural tools as rational strategies; and it shows how smart heuristics can exploit the structure of environments.

Bounded Rationality and Policy Diffusion
Bounded Rationality and Policy Diffusion

Author: Kurt Weyland

Publisher: Princeton University Press

Published: 2009-02-09

Total Pages: 313

ISBN-13: 1400828066

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Why do very different countries often emulate the same policy model? Two years after Ronald Reagan's income-tax simplification of 1986, Brazil adopted a similar reform even though it threatened to exacerbate income disparity and jeopardize state revenues. And Chile's pension privatization of the early 1980s has spread throughout Latin America and beyond even though many poor countries that have privatized their social security systems, including Bolivia and El Salvador, lack some of the preconditions necessary to do so successfully. In a major step beyond conventional rational-choice accounts of policy decision-making, this book demonstrates that bounded--not full--rationality drives the spread of innovations across countries. When seeking solutions to domestic problems, decision-makers often consider foreign models, sometimes promoted by development institutions like the World Bank. But, as Kurt Weyland argues, policymakers apply inferential shortcuts at the risk of distortions and biases. Through an in-depth analysis of pension and health reform in Bolivia, Brazil, Costa Rica, El Salvador, and Peru, Weyland demonstrates that decision-makers are captivated by neat, bold, cognitively available models. And rather than thoroughly assessing the costs and benefits of external models, they draw excessively firm conclusions from limited data and overextrapolate from spurts of success or failure. Indications of initial success can thus trigger an upsurge of policy diffusion.

Lectures on Behavioral Macroeconomics
Lectures on Behavioral Macroeconomics

Author: Paul De Grauwe

Publisher: Princeton University Press

Published: 2012-10-14

Total Pages: 147

ISBN-13: 1400845378

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In mainstream economics, and particularly in New Keynesian macroeconomics, the booms and busts that characterize capitalism arise because of large external shocks. The combination of these shocks and the slow adjustments of wages and prices by rational agents leads to cyclical movements. In this book, Paul De Grauwe argues for a different macroeconomics model--one that works with an internal explanation of the business cycle and factors in agents' limited cognitive abilities. By creating a behavioral model that is not dependent on the prevailing concept of rationality, De Grauwe is better able to explain the fluctuations of economic activity that are an endemic feature of market economies. This new approach illustrates a richer macroeconomic dynamic that provides for a better understanding of fluctuations in output and inflation. De Grauwe shows that the behavioral model is driven by self-fulfilling waves of optimism and pessimism, or animal spirits. Booms and busts in economic activity are therefore natural outcomes of a behavioral model. The author uses this to analyze central issues in monetary policies, such as output stabilization, before extending his investigation into asset markets and more sophisticated forecasting rules. He also examines how well the theoretical predictions of the behavioral model perform when confronted with empirical data. Develops a behavioral macroeconomic model that assumes agents have limited cognitive abilities Shows how booms and busts are characteristic of market economies Explores the larger role of the central bank in the behavioral model Examines the destabilizing aspects of asset markets