Optimal monetary policy under bounded rationality

Arbeitspapier

Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. The optimality of a particular regime is found to be independent of bounded rationality and only regime 's stabilizing properties condition its hierarchy. For every targeting regime, the policymaker 's knowledge of agents' myopia is decisive in terms of policy reactions. Welfare evaluation of different targeting regimes reveals that bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can increase welfare.

Object Details

• ISBN: 978-952-323-222-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 9/2018

Classification and Topics

• Classification: Wirtschaft ; Forecasting Models; Simulation Methods ; Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications ; Monetary Policy ; Microeconomic Behavior: Underlying Principles ; Consumer Economics: Theory

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Benchimol, Jonathan ; Bounader, Lahcen
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/212417
• Last update: 10.03.2025, 11:42 AM CET