Bounded rationality and parameters’ uncertainty in a simple monetary policy model

Domenico Colucci and Vincenzo Valori

No 2012-03, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

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: inflation targeting; monetary policy; adaptive expectations; heterogeneous agents (search for similar items in EconPapers)
Pages: 14 pages
Date: 2012-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:flo:wpaper:2012-03

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