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A Monetary Model of Growth with Limited Foresight

Author

Listed:
  • Francesco Magris
  • Daria Onori

    (LEO - Laboratoire d'Économie d'Orleans [2022-...] - UO - Université d'Orléans - UT - Université de Tours - UCA - Université Clermont Auvergne)

Abstract

Rational expectations are often questioned in light of their overly demanding assumptions. Thus, an increasing literature introduces some form of bounded rationality.In this paper, we study real and monetary growth models with agents endowed with limited foresight. Accordingly, in each period, economic plans extend only for a limited number of periods and are reformulated in each subsequent date. We show that limited foresight may lead to capital under-investment and be thus growth-detrimental. However, by relaxing progressively myopia, the economy converges to the Perfect Foresight equilibrium. We prove the existence of a monetary Balanced Growth Path (BGP ) beside the non monetary one and compare it with the outcome obtained under perfect foresight. We also perform a stability analysis and show that the monetary BGP is globally unstable (stable) while the non monetary one is globally stable (unstable) when money is positive (negative). Finally, we identify the optimal monetary policy maximizing welfare. Limited foresight, in contrast to a widespread literature, thus restores monetary equilibria even in absence of limited participation, financial frictions and borrowing constraints.

Suggested Citation

  • Francesco Magris & Daria Onori, 2024. "A Monetary Model of Growth with Limited Foresight ," Working Papers hal-04702218, HAL.
  • Handle: RePEc:hal:wpaper:hal-04702218
    DOI: 10.5281/zenodo.13767455
    Note: View the original document on HAL open archive server: https://univ-orleans.hal.science/hal-04702218v1
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    More about this item

    Keywords

    JEL Classification: C61 C62 E40 O42 Growth Limited foresight Money Monetary policy Myopic behavior; JEL Classification: C61; C62; E40; O42; Growth; Limited foresight; Money; Monetary policy; Myopic behavior;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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