Using Behavioral insights in monetary policy…

Mark Calabria of Cato has a nice short paper reviewing the literature on the topic.

Behavioral economics has continued to gain momentum in challenging the standard rational actor model in economics. With a few exceptions, the emphasis has been on the cognitive failure of individuals outside of government. Niclas Berggren (2013: 200) estimates that 95.5 percent of behavioral economics articles in the leading economics journals do not contain an analysis of the cognitive ability of policymakers. In this article, I offer a preliminary analysis of potential cognitive failures in the Federal Reserve’s conduct of monetary  policy. Proposals to “debias” monetary policymaking are offered, along with a discussion of how the Fed’s existing institutional structure ameliorates or exasperates potential biases.

The proposals to debias policy are adopting rules, appointing a committee to decide monetary policy and so on. But none have really worked as all of them suffer from their own biases. For instance monetary policy committees have been there for a while but they haven’t really helped in policies in advanced economies. There is just too much similar type of group thinking . Most members agree to the chief and the biases are hardly removed. Similarly Taylor rules have all kinds of measurement issues.

Actually, behavioral economics has this other side to it as well. We usually study beh eco to study biases  and try make policies to address these biases. But human nature is such that there are always unintended consequences. You try alter some behavior and some other issue crops up.

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