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Optimal Monetary Policy Under Bounded Rationality
Author:
Jonathan Benchimol null

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Lahcen Bounader null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 166
Language:
English
Publication Date:
02 Aug 2019
DOI:
https://doi.org/10.5089/9781498324588.001
ISBN:
9781498324588
ISSN:
1018-5941
Pages:
52
Keywords:
WP; central bank; monetary policy
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund