Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Modeler
17 Pages Posted: 22 Feb 2016
Date Written: February 2016
Abstract
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 inflation is below the inflation target. Conversely when status-quo inflation is above the target rate, inertial policy does not occur until the level of inflation discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.
Keywords: Monestary Policy, Behavorial Economics
JEL Classification: D7, E5
Suggested Citation: Suggested Citation