Abstract
This study investigates equilibrium determinacy in a two-sector behavioral New Keynesian model, allowing for heterogeneous cognitive discounting across sectors. Using a simplified model, we analytically demonstrate that bounded rationality affects both lower and upper bounds on the inflation stabilization coefficient under a forward-looking Taylor rule. Numerical exercises show that stronger cognitive discounting under the benchmark calibration widens the determinacy region relative to the rational expectations benchmark. The numerical results also show that headline inflation targeting provides a stable nominal anchor across alternative configurations of sectoral expectations. The analysis identifies a novel interaction between sectoral inflation dynamics, bounded rationality, and equilibrium determinacy.
Mitsuhiro Okano
Associate Professor of Economics
My research interests include monetary policy, new open economy macroeconomics and regional economics.