scholarly journals Monetary Policy, Bounded Rationality, and Incomplete Markets

2017 ◽  
Author(s):  
Emmanuel Farhi ◽  
Iván Werning
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Incomplete Markets

scholarly journals Monetary Policy, Bounded Rationality, and Incomplete Markets

2019 ◽  
Vol 109 (11) ◽  
pp. 3887-3928 ◽  
Author(s):  
Emmanuel Farhi ◽  
Iván Werning
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Incomplete Markets ◽  
Idiosyncratic Risk ◽  
Borrowing Constraints ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Benchmark Model ◽  
Forward Guidance ◽  
Keynesian Model

This paper extends the benchmark New-Keynesian model by introducing two frictions: (i) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally-binding borrowing constraints; and (ii) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is more pronounced at long horizons, and offers a potential rationalization of the “forward guidance puzzle.” Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model. (JEL D52, D81, E12, E52)

scholarly journals Optimal Monetary Policy Under Bounded Rationality

2018 ◽  
Vol 2018 (336) ◽  
Author(s):  
Jonathan Benchimol ◽  
◽  
Lahcen Bounader ◽  
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Optimal Monetary Policy

scholarly journals Optimal Monetary Policy Under Bounded Rationality

2019 ◽  
Vol 19 (166) ◽  
Author(s):  
Jonathan Benchimol ◽  
Lahcen Bounader
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Optimal Policy ◽  
Inflation Targeting ◽  
Price Level ◽  
Inflation Expectations ◽  
Optimal Monetary Policy ◽  
Policy Regime ◽  
Welfare Losses ◽  
Simple Rules

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.

scholarly journals Bounded rationality, monetary policy, and macroeconomic stability

2020 ◽  
Vol 186 ◽  
pp. 108522 ◽  
Author(s):  
Francisco Ilabaca ◽  
Greta Meggiorini ◽  
Fabio Milani
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Macroeconomic Stability
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