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This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model — with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter in turn affects the power of monetary and fiscal policy in a microfounded general equilibrium
From:
Xavier Gabaix
NYU
This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model — with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter in turn affects the power of monetary and fiscal policy in a microfounded general equilibrium
From:
Xavier Gabaix
NYU