Monetary policy rules under bounded rationality

Arbeitspapier

We study the welfare performance of various simple monetary policy rules under bounded rationality (BR) along the lines of Gabaix (2020) in a New Keynesian model with sticky wages and an effective lower bound (ELB) on interest rates. Policy strategies with a strong history dependence lose their advantage over inflation targeting in mitigating a demand-driven recessions when interest rates are constrained by the ELB. For supply shocks, inflation t argeting o utperforms h istory-dependent r ules f or a s ufficiently high degree of BR. An exponential average inflation targeting rule, which features a variable degree of history dependence, performs remarkably well, independent of the degree of BR.

Object Details

• ISBN: 978-3-95729-949-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Deutsche Bundesbank Discussion Paper ; No. 18/2023

Classification and Topics

• Classification: Wirtschaft ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity ; Price Level; Inflation; Deflation ; Business Fluctuations; Cycles ; Monetary Policy
• Subject: Bounded Rationality ; Sticky Wages ; Monetary Policy Strategies ; Zero LowerBound

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dobrew, Michael ; Gerke, Rafael ; Kienzler, Daniel ; Schwemmer, Alexander
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/273730
• Last update: 10.03.2025, 11:41 AM CET