Event Details

Seminar hosted by the Economics Department

Joep Lustenhouwer will present Seminar on “The Rationality Bias”

Abstract

We analyze differences in consumption and wealth in a New Keynesian model with rational households and households that are less sophisticated. The rationality bias of boundedly rational households systematically explains the emergence of consumption and wealth heterogeneity. This rationality bias can be decomposed into three individual components: the consumption expectation bias, the real interest rate bias and the preference shock expectation bias. For certain specifications of monetary policy these different components exactly offset each other, so that the rationality bias is eliminated. This might, however, not be desirable from a welfare perspective, since eliminating the rationality bias comes along with highinflation volatility.