Monetary Policy, Bounded Rationality, and Incomplete Markets

• 成果类型: Article
• 署名作者: Farhi, Emmanuel; Werning, Ivan
• 署名单位: Harvard University; Massachusetts Institute of Technology (MIT)
• 刊物名称: AMERICAN ECONOMIC REVIEW
• ISSN/ISSBN: 0002-8282
• DOI: 10.1257/aer.20171400
• 发表日期: 2019
• 页码: 3887-3928
• 关键词: players models; guessing games; debt; cognition; guidance; BEHAVIOR

摘要

This paper extends the benchmark New-Keynesian model by introducing two frictions: (i) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally-binding borrowing constraints; and (ii) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is more pronounced at long horizons, and offers a potential rationalization of the forward guidance puzzle. Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model.