Monetary Policy and Behavioural Finance

Abstract

There have been major advances in both theory and econometric techniques in mainstream macro-models and parallel advances in knowledge of the monetary transmission mechanism acting via asset prices. At the same time, behavioural finance has provided evidence that not all actors in the economy are 'fully rational' and this has influenced models of asset pricing on which part of the monetary policy transmission mechanism depends. Such uncertainty about the behaviour of asset prices has in part stimulated a move towards 'robustness', as an important criterion for guiding monetary policy. We argue that although we have discovered much, including 'what not to do', nevertheless our knowledge of the transmission mechanism is very incomplete. This is because, in spite of all the theoretical advances that have been made, there is still considerable uncertainty over the behaviour of agents, which has been reinforced by insights from behavioural finance. Monetary Policy and Behavioural FinanceThis paper is an attempt at a brief and therefore necessarily selective account of the links between monetary theory, the asset pricing literature and practical monetary policy. A key part of the story is the ingenuity of academic economists in developing and promoting alternative theoretical models and whether policy makers have been influenced by such models. The paper takes a slightly wider perspective than is usual when discussing monetary policy, by incorporating relevant evidence from behavioural finance, particularly when discussing our understanding of asset prices. We argue that although we have discovered much, including 'what not to do', nevertheless our knowledge of the transmission mechanism is very incomplete. This is because, in spite of all the theoretical advances that have been made, there is still considerable uncertainty over the behaviour of agents, which has been reinforced by insights from behavioural finance.

Contributions on Macroeconomics and Policy

“…Other monetary policy papers of note include: Muscatelli and Trecroci (2000) on monetary policy operating rules, Ambler (2009) on price‐level targeting, and Bordes and Clerc (2007) on the ECB's policy strategy. Sellin's (2001) paper on “Monetary Policy and the Stock Market” and the related more recent papers on “Monetary Policy and Behavioural Finance” (Cuthbertson et al , 2007), wealth effects (Paiella, 2009) and Hassan et al (2011) in this issue, provide valuable insights into recent macroeconomic performance, while Yates masterful (2004) survey of “Monetary Policy and the Zero Bound to Interest Rates” turned out to be more widely relevant than many would have anticipated at the time of its publication.…”

Modelo de análisis multivariante aplicado a la predicción de la tendencia del tipo de cambio euro-dólar

“…En los últimos años, la atención se ha centrado en las Finanzas Conductuales debido al interés por explicar la influencia de las Anomalías del Mercado en la valoración de los activos financieros [153,154]. La incertidumbre en el comportamiento de los precios ha influido, en parte, en la búsqueda de nuevos procedimientos de valoración y en la previsión de sus precios [155,156,157,158,159].…”