IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v57y2025i2-3p515-547.html
   My bibliography  Save this article

The Rationality Bias

Author

Listed:
  • TIM HAGENHOFF
  • JOEP LUSTENHOUWER
  • MIKE TSIONAS

Abstract

We analyze differences in consumption and wealth in an estimated New Keynesian model with rational and boundedly rational households. Shocks are shown to cause consumption and wealth heterogeneity due to the “rationality bias” of boundedly rational households. This bias can be decomposed into three components, which, for certain specifications of monetary policy, can exactly offset each other. Moreover, a more hawkish response to inflation leads to more volatility in consumption and wealth heterogeneity, which makes it optimal for the central bank to set lower coefficients in the Taylor rule than would have been the case under homogeneous rational expectations.

Suggested Citation

  • Tim Hagenhoff & Joep Lustenhouwer & Mike Tsionas, 2025. "The Rationality Bias," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(2-3), pages 515-547, March.
    • Handle: RePEc:wly:jmoncb:v:57:y:2025:i:2-3:p:515-547
    DOI: 10.1111/jmcb.13122
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jmcb.13122
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jmcb.13122?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jmoncb:v:57:y:2025:i:2-3:p:515-547. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.