Monetary Policy when Preferences are Quasi-Hyperbolic

Dennis, R. and Kirsanov, O. (2020) Monetary Policy when Preferences are Quasi-Hyperbolic. Working Paper. University of Glasgow.

Abstract

We study discretionary monetary policy in an economy where economic agents have quasi-hyperbolic discounting. We demonstrate that a benevolent central bank is able to keep inflation under control for a wide range of discount factors. If the central bank, however, does not adopt the household's time preferences and tries to discourage early-consumption and delayed-saving, then a marginal increase in steady state output is achieved at the cost of a much higher average inflation rate. Indeed, we show that it is desirable from a welfare perspective for the central bank to quasi-hyperbolically discount by more than households do. Welfare is improved because this discount structure emphasizes the current-period cost of price changes and leads to lower average inflation. We contrast our results with those obtained when policy is conducted according to a Taylor-type rule.

• Item Type: Research Reports or Papers (Working Paper)
• Status: Published
• Refereed: No
• Glasgow Author(s) Enlighten ID: Kirsanov, Dr Oleg and Dennis, Professor Richard
• Authors: Dennis, R., and Kirsanov, O.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: University of Glasgow Working Paper
• Publisher: University of Glasgow

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