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Monetary policy, banking and heterogeneous agents

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  • Marcin Wolski

    (Center for Nonlinear Dynamics in Economics and Finance (CeNDEF), University of Amsterdam, The Netherlands and Bielefeld Graduate School of Economics and Management (BiGSEM), Faculty of Economics, Bielefeld University)

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.

Suggested Citation

  • Marcin Wolski, 2012. "Monetary policy, banking and heterogeneous agents," NBP Working Papers 136, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:136
    Note: ARE WE REALLY FORWARD-LOOKING? MEASURING AND TESTING EXPECTATIONS – CENTRAL BANK PERSPECTIVE, National Bank of Poland, 29-30 November, 2012 Warsaw, Poland
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    References listed on IDEAS

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    1. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x, December.
    2. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, December.
    3. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    4. Pfajfar, D. & Zakelj, B., 2011. "Inflation Expectations and Monetary Policy Design : Evidence from the Laboratory (Replaces CentER DP 2009-007)," Discussion Paper 2011-091, Tilburg University, Center for Economic Research.
    5. Julio J. Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361, National Bureau of Economic Research, Inc.
    6. Massaro, Domenico, 2013. "Heterogeneous expectations in monetary DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 680-692.
    7. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
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    More about this item

    Keywords

    banking sector; monetary policy; heterogeneous agents;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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