EconPapers    
Economics at your fingertips  
 

Doves, hawks and pigeons: Behavioral monetary policy and interest rate inertia

Federico Favaretto and Donato Masciandaro ()

Journal of Financial Stability, 2016, vol. 27, issue C, 50-58

Abstract: Behavioral bias – loss aversion – can explain monetary policy inertia in setting interest rates. Economic literature has tended to explain inertia in monetary policymaking in terms of frictions and delays, or has stressed the role of governance rules. We introduce a new driver of inertia, independent from frictions and central bank governance settings. While the degree of conservatism doesn’t necessarily produce monetary inertia, we show that introducing loss aversion in individual behavior influences the stance of monetary policy under three different but convergent perspectives. First of all, a Moderation Effect can emerge, i.e. the number of pigeons increases. At the same time also a Hysteresis Effect can become relevant, whereby both doves and hawks soften their attitudes. Finally a Smoothing Effect tends to stabilize the number of pigeons. Together, the three effects consistently cause higher monetary policy inertia.

Keywords: Monetary policy inertia; Central banking; Behavioral economics (search for similar items in EconPapers)
JEL-codes: E03 E52 E58 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1572308916300985
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Doves, Hawks and Pigeons: Behavioral Monetary Policy and Interest Rate Inertia (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:27:y:2016:i:c:p:50-58

DOI: 10.1016/j.jfs.2016.09.002

Access Statistics for this article

Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

More articles in Journal of Financial Stability from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-03-23
Handle: RePEc:eee:finsta:v:27:y:2016:i:c:p:50-58