A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality

Joel Wagner (), Tudor Schlanger and Yang Zhang

No 2022-4, Discussion Papers from Bank of Canada

Abstract: We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative m2netary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes’ performance with and without an effective lower bound constraint. Our results suggest that the performance of history-dependent frameworks is sensitive to departures from rational expectations. The benefits of adopting history-dependent frameworks over flexible inflation targeting gradually diminish with a greater degree of bounded rationality. This finding is in line with laboratory experiments that show flexible inflation targeting remains a robust framework to stabilize macroeconomic fluctuations.

Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E E27 E3 E4 E58 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:22-4

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