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Optimal Monetary Policy in Behavioral New Keynesian Model

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  • Lahcen, BOUNADER

Abstract

This paper conducts the first assessment of the optimal monetary policy in the case of behavioral New Keynesian model proposed by Gabaix (2016). Consistent with the previous studies, I find that monetary policy under commitment continues to be important for optimal policy, but the optimal policy is found to be more history-dependent than in the traditional New Keynesian model. Importantly, I find that monetary policy under discretion may be optimal under some constraints on the parameters of the model which seems to correspond better to the reality of the conduct of monetary policy in central banks of developing, emerging and transitional economies. This finding is considered as filling the gap that always has been between the practice and the theory of the optimal monetary policy.

Suggested Citation

  • Lahcen, BOUNADER, 2016. "Optimal Monetary Policy in Behavioral New Keynesian Model," MPRA Paper 74743, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:74743
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    References listed on IDEAS

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    3. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438, Elsevier.
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    9. Xavier Gabaix, 2020. "A Behavioral New Keynesian Model," American Economic Review, American Economic Association, vol. 110(8), pages 2271-2327, August.
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    18. Gabaix, Xavier, 2015. "Behavioral Macroeconomics Via Sparse Dynamic Programming," CEPR Discussion Papers 11026, C.E.P.R. Discussion Papers.
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    1. Xavier Gabaix, 2020. "A Behavioral New Keynesian Model," American Economic Review, American Economic Association, vol. 110(8), pages 2271-2327, August.

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    More about this item

    Keywords

    Optimal Monetary Policy; Behavioral New Keynesian Model;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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