Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266065 
Year of Publication: 
2022
Series/Report no.: 
Bank of Canada Staff Discussion Paper No. 2022-4
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada's adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative monetary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes' performance with and without an effective lower bound constraint. Our results suggest that the performance of history-dependent frameworks is sensitive to departures from rational expectations. The benefits of adopting history-dependent frameworks over flexible inflation targeting gradually diminish with a greater degree of bounded rationality. This finding is in line with laboratory experiments that show flexible inflation targeting remains a robust framework to stabilize macroeconomic fluctuations
Subjects: 
Central bank research
Economic models
Monetary policy framework
Monetary policy transmission
JEL: 
E
E2
E27
E3
E4
E5
E52
E58
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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