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Firms’ rational expectations, workers’ psychology, and monetary policy in a behavioral real business cycle model

Gerasimos Soldatos () and Erotokritos Varelas

Economic Analysis and Policy, 2017, vol. 53, issue C, 129-139

Abstract: This paper is based on cognitive psychology’s view of “curvilinear” optimism–pessimism and hence, contains a flavor of behavioral macroeconomics. The substructure of a real overlapping-generations business cycle model is assumed to be underlined by the long-term character of firms’ rational expectations. This model is combined with the workers’ “bell-shaped” optimism–pessimism about a fractional-reserve-banking economy. An exogenous shock will be propagated through this workers’ psychology. Policy-wise, the public sector is ignored and the only purpose of the monetary authority is to secure the efficiency of intergenerational income distribution in a business environment with zero full-employment general-equilibrium profit. Within this context, monetary policy is found to be in the spirit of the Old Chicago quantity theory in that monetary expansion is anti-recessionary, and the increase of the reserve ratio is shown to be anti-inflationary. It is a viewpoint with Chartalist flavor.

Keywords: Curvilinear mood; Economic activity; Monetary expansion; Old Chicago quantity theory; Chartalism (search for similar items in EconPapers)
JEL-codes: E03 E23 E31 E51 E52 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.eap.2017.01.003

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