Monetary policy, banking and heterogeneous agents

Marcin Wolski

No 136, NBP Working Papers from Narodowy Bank Polski

Abstract: The influence of heterogeneous expectations on monetary policy performance has gained a lot of attention in the recent years. It proved to be an important factor that, under some circumstances, may even destabilize the economy (Massaro, 2012). This paper investigates the phenomenon of heterogeneous expectations further, analyzing its role in the monetary policy conduct with an active banking sector. In our analysis we assume a constant fraction of boundedly rational agents who use simple heuristics to form their expectations. The impact of those biased beliefs is studied in the framework, originally developed by Goodfriend and McCallum (2007). We first show that the presence of the banking sector changes the determinacy structure of the system and, depending on the heuristics used, the presence of the boundedly rational agents might have either stabilizing or destabilizing effect. In particular, when boundedly rational agents extrapolate the past performance in forming their expectations, the range of the stable (determinate) monetary policy instruments is narrowed.

Keywords: banking sector; monetary policy; heterogeneous agents (search for similar items in EconPapers)
JEL-codes: C62 D84 E52 (search for similar items in EconPapers)
Pages: 35
Date: 2012
Note: ARE WE REALLY FORWARD-LOOKING? MEASURING AND TESTING EXPECTATIONS – CENTRAL BANK PERSPECTIVE, National Bank of Poland, 29-30 November, 2012 Warsaw, Poland
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://static.nbp.pl/publikacje/materialy-i-studia/136_en.pdf (application/pdf)

Related works:
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:nbp:nbpmis:136

Access Statistics for this paper

More papers in NBP Working Papers from Narodowy Bank Polski Contact information at EDIRC.
Bibliographic data for series maintained by Jakub Growiec ().