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Optimal monetary policy under bounded rationality

Jonathan Benchimol () and Lahcen Bounader

No 9/2018, Research Discussion Papers from Bank of Finland

Abstract: Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. The optimality of a particular regime is found to be independent of bounded rationality and only regime 's stabilizing properties condition its hierarchy. For every targeting regime, the policymaker 's knowledge of agents' myopia is decisive in terms of policy reactions. Welfare evaluation of different targeting regimes reveals that bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can increase welfare.

JEL-codes: C53 E37 E52 D01 D11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
Date: 2018-04-19
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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:2018_009

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