Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Model

Federico Favaretto and Donato Masciandaro ()

No 1617, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: Can the inertia in the monetary policymaking be attributed to psychological drivers? Our model shows two results. First, our baseline model with individual loss aversion explains inertia in a monetary policy committee (MPC) where holds a de jure majority rule. Second, our second model shows that introducing a specification of loss aversion for all members in a MPC leads to inertial decisions when status-quo ination is below the ination target. Conversely when status-quo ination is above the target rate, inertial policy does not occur until the level of ination discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.

Keywords: Monetary Policy; Behavioral Economics (search for similar items in EconPapers)
JEL-codes: D7 E5 (search for similar items in EconPapers)
Pages: 17
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-mac, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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