Stabilizing inflation in a simple monetary policy model with heterogeneous agents

We study a simple monetary model in which a central bank faces a boundedly rational private sector and has the goal of stabilizing inflation. The system’s dynamics is generated by the interaction of the expectations about inflation of the various agents involved. A modest degree of heterogeneity in such expectations is found to have interesting consequences, in particular when the central bank is uncertain about the relevant behavioral parameters. We find that a simple heuristic based on mean and variance of the distribution of behavioural parameters stabilizes the system for a wide parametric region. © 2013 IMACS. Published by Elsevier B.V. All rights reserved. JEL classification: C62; D84; E52