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Optimal Monetary Policy Under Bounded Rationality

Jonathan Benchimol () and Lahcen Bounader

No 336, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

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. Stabilizing properties and bounded rationality-independence generally affect the regime's optimality. The policymaker's knowledge of an agent's myopia is decisive, whereas bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can be welfare increasing.

JEL-codes: C53 D01 D11 E37 E52 (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: 2018-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:336

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DOI: 10.24149/gwp336

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