Stabilizing inflation in a simple monetary policy model with heterogeneous agents

Domenico Colucci and Vincenzo Valori

Mathematics and Computers in Simulation (MATCOM), 2015, vol. 108, issue C, 233-244

Abstract: We study a simple monetary model in which a central bank faces a boundedly rational private sector and has the goal of stabilizing inflation. The system's dynamics is generated by the interaction of the expectations about inflation of the various agents involved. A modest degree of heterogeneity in such expectations is found to have interesting consequences, in particular when the central bank is uncertain about the relevant behavioral parameters. We find that a simple heuristic based on mean and variance of the distribution of behavioural parameters stabilizes the system for a wide parametric region.

Keywords: Heterogeneous expectations; Bounded rationality; Stability of steady states; Inflation targeting; Monetary policy (search for similar items in EconPapers)
JEL-codes: C62 D84 E52 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:108:y:2015:i:c:p:233-244

DOI: 10.1016/j.matcom.2013.09.002

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