The psychology of inflation, monetary policy and macroeconomic instability

Edoardo Gaffeo and Giulia Canzian

The Journal of Socio-Economics, 2011, vol. 40, issue 5, pages 660-670

Abstract: This paper extends a stylized AD/AS macroeconomic model to a setting in which inflation dynamics impinges on the sentiment of the public toward the future course of the economy. As individuals are allowed to exchange information on their personal mood and to persuade each other through repeated interactions, waves of optimism and pessimism emerge endogenously. The model is then used to analyze the stabilizing effect of alternative monetary policy rules.

Keywords: Behavioural economics; Monetary policy; Animal spirits (search for similar items in EconPapers)
Date: 2011
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Persistent link: http://EconPapers.repec.org/RePEc:eee:soceco:v:40:y:2011:i:5:p:660-670

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