Monetary Policy Analysis when Planning Horizons are Finite

Arbeitspapier

It is common to analyze the effects of alternative monetary policy commitments under the assumption of fully model-consistent expectations. This implicitly assumes unrealistic cognitive abilities on the part of economic decision makers. The relevant question, however, is not whether the assumption can be literally correct, but how much it would matter to model decision making in a more realistic way. A model is proposed, based on the architecture of artificial intelligence programs for problems such as chess or go, in which decision makers look ahead only a finite distance into the future, and use a value function learned from experience to evaluate situations that may be reached after a finite sequence of actions by themselves and others. Conditions are discussed under which the predictions of a model with finite-horizon forward planning are similar to those of a rational expectations equilibrium, and under which they are instead quite different. The model is used to re-examine the consequences that should be expected from a central-bank commitment to maintain a fixed nominal interest rate for a substantial period of time. Neo-Fisherian predictions are shown to depend on using rational expectations equilibrium analysis under circumstances in which it should be expected to be unreliable.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7108

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy
• Subject: forward guidance ; neo-Fisherianism ; Fisher equation ; bounded rationality

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Woodford, Michael
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/181308
• Last update: 10.03.2025, 11:44 AM CET