Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Model

Can the inertia in the monetary policymaking be attributed to psychological drivers? Our model shows two results. First, our baseline model with individual loss aversion explains inertia in a monetary policy committee (MPC) where holds a de jure majority rule. Second, our second model shows that introducing a specification of loss aversion for all members in a MPC leads to inertial decisions when status-quo ination is below the ination target. Conversely when status-quo ination is above the target rate, inertial policy does not occur until the level of ination discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.