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Optimal Monetary Policy in Behavioral New Keynesian Model

Lahcen, BOUNADER (2016): Optimal Monetary Policy in Behavioral New Keynesian Model.

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Abstract

This paper conducts the first assessment of the optimal monetary policy in the case of behavioral New Keynesian model proposed by Gabaix (2016). Consistent with the previous studies, I find that monetary policy under commitment continues to be important for optimal policy, but the optimal policy is found to be more history-dependent than in the traditional New Keynesian model. Importantly, I find that monetary policy under discretion may be optimal under some constraints on the parameters of the model which seems to correspond better to the reality of the conduct of monetary policy in central banks of developing, emerging and transitional economies. This finding is considered as filling the gap that always has been between the practice and the theory of the optimal monetary policy.

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