Monetary Policy When Preferences Are Quasi-Hyperbolic

Wed, 01 Jan 2025 00:00:00 +0000

Research question and motivation: Experimental and survey evidence robustly documents “present bias” — people are more impatient over the short run than the long run, producing preference reversals inconsistent with standard exponential discounting. Dennis and Kirsanov ask how this behavioral feature, modeled as quasi-hyperbolic (quasi-geometric) discounting, changes the optimal conduct of monetary policy. Prior macro work on quasi-hyperbolic discounting concentrated on growth models, consumption/saving, and multiple equilibria; almost none examined monetary policy. The paper fills this gap.

Policy Biases in a Model with Labor-Market Frictions

Research Question

Dennis and Kirsanova ask whether shocks to labor-market matching efficiency and worker bargaining power pose a significant problem for monetary policy, and whether the inability to commit (discretion versus commitment) generates important stabilization bias in a model with labor-market matching frictions. They also examine how several popular simple monetary policy rules perform in response to these and other shocks.

Model and Methodology

The paper develops a fully nonlinear DSGE model featuring: (1) a goods market characterized by monopolistic competition and Rotemberg-style quadratic price-adjustment costs; and (2) a labor market characterized by a constant-returns-to-scale matching function (Mortensen-Pissarides) and Nash bargaining over wages and hours worked. Because the flex-price equilibrium is inefficient — owing to both monopolistic competition and the matching friction — a linear-quadratic approximation is not valid for the discretionary policy problem, and the authors solve the model using Smolyak sparse-grid methods with Chebyshev polynomial basis functions.

Richard Dennis | Macro Paper Warehouse

Monetary Policy When Preferences Are Quasi-Hyperbolic

Policy Biases in a Model with Labor-Market Frictions