In this paper the authors explore the ability of simple monetary models with bounded rationality to account for the joint distribution of money and prices. They impose restrictions on the size of the mistakes agents can make in equilibrium and argue that countries with high inflation are likely to satisfy these restrictions. Their computations show that the model with bounded rationality does neither improve nor deteriorate the ability of the model to match the data.
JEL classification: D83, E17, E31
Keywords: inflation, money demand, quasi-rationality
The authors want to thank Rodi Manuelli, Andy Neumeyer, and Mike Woodford for comments, and Demian Pouzo for excellent research assistance. This paper was presented at the Monetary Policy and Learning Conference sponsored by the Federal Reserve Bank of Atlanta in March 2003. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
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