Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/193907
Authors: 
Hagenhoff, Tim
Lustenhouwer, Joep
Year of Publication: 
2019
Series/Report no.: 
BERG Working Paper Series 144
Abstract: 
We analyze differences in consumption and wealth that arise because of different degrees of rationality of households. In particular, we use a standard New Keynesian model and let a certain fraction of households be fully rational while the other fraction possesses less cognitive ability. We identify the rationality bias of boundedly rational agents, defined as a deviation from the fully rational benchmark, as the driver of consumption and wealth heterogeneity. It turns out that the rationality bias can be decomposed into three individual components: the consumption expectation bias, the real interest rate bias and the preference shock expectation bias. We show that for certain specifications of monetary policy the rationality bias can be eliminated because its individual components exactly offset each other although they are individually non-zero. However, it might not be desirable from a welfare perspective to eliminate the rationality bias as this comes along with high inflation volatility.
Subjects: 
heterogeneous expectations
bounded rationality
consumption and wealth heterogeneity
monetary policy
JEL: 
E32
E52
D84
ISBN: 
978-3-943153-65-1
Document Type: 
Working Paper

Files in This Item:
File
Size
467.62 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.