Monetary policy rules under bounded rationality

Michael Dobrew, Rafael Gerke, Daniel Kienzler and Alexander Schwemmer

No 18/2023, Discussion Papers from Deutsche Bundesbank

Abstract: We study the welfare performance of various simple monetary policy rules under bounded rationality (BR) along the lines of Gabaix (2020) in a New Keynesian model with sticky wages and an effective lower bound (ELB) on interest rates. Policy strategies with a strong history dependence lose their advantage over inflation targeting in mitigating a demand-driven recessions when interest rates are constrained by the ELB. For supply shocks, inflation t argeting o utperforms h istory-dependent r ules f or a s ufficiently high degree of BR. An exponential average inflation targeting rule, which features a variable degree of history dependence, performs remarkably well, independent of the degree of BR.

Keywords: Bounded Rationality; Sticky Wages; Monetary Policy Strategies; Zero LowerBound (search for similar items in EconPapers)
JEL-codes: E20 E24 E31 E32 E52 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:182023

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