Monetary Neutrality under Evolutionary Dominance of Bounded Rationality

Gilberto Lima and Jaylson Silveira ()

No 2013_03, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non-updated information and establish a lagged optimal price (bounded rationality strategy). We devise an evolutionary micro-dynamics (with and without mutation) that, by interacting to the dynamics of the aggregate variables, determines the co-evolution of the frequency distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, the evolutionary learning dynamics takes the information-updating process to a long-run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and monetary shocks have persistent, though not permanent, impacts on real output.

Keywords: boundedly rational innatentiveness; evolutionary dynamics; monetary neutrality (search for similar items in EconPapers)
JEL-codes: C73 D83 E31 (search for similar items in EconPapers)
Date: 2013-02-20
New Economics Papers: this item is included in nep-cba, nep-evo, nep-hme, nep-mac and nep-mon
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http://onlinelibrary.wiley.com/doi/10.1111/ecin.12195/abstract (application/pdf)

Related works:
Journal Article: MONETARY NEUTRALITY UNDER EVOLUTIONARY DOMINANCE OF BOUNDED RATIONALITY (2015)
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