Original scientific paper
https://doi.org/10.1080/1331677X.2020.1869577
Does rationality matter to the central bank?
H. E. Cha
Abstract
Rationality is one of the main assumptions in economics, and is
represented as the rational expectation in macroeconomics. As
such, it is important to note that the effectiveness of economic
policy depends on the degree of economic agents’ rationality.
According to this point of view, it is only natural to ask how the
central bank views economic agents to be either rational or
bounded rational. In implementing economic policies, it is possible to assume that the central bank views economic agents to
be bounded rational. This is due to the fact that most theoretical
arguments state that policy under rationality is not as effective as
one under bounded rationality. Based on this argument, this
paper employs bounded rational New Keynesian Model proposed
by Gabaix to know if rationality matters to the central bank. As a
result, as long as the central bank does not follow the full gradualism, it is possible to conclude that the rationality matters to
the central bank. However, it is not anymore if the central bank
employs full gradualism in monetary policy rule.
Keywords
Rationality; Taylor Rule; Bayesian estimation
Hrčak ID:
301648
URI
Publication date:
31.12.2021.
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