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Doves, Hawks and Pigeons: Behavioral Monetary Policy Making

Author(s): Donato Masciandaro

Date published: Nov 2016

SUERF Policy Note, Issue No 8
by Donato Masciandaro, Department of Economics and Baffi Carefin Centre, Bocconi University and SUERF

JEL-codes: E52, E58, E03.
Keywords: Monetary Policy Inertia, Central Banking, Behavioral Economics.

“Too little, too late” or “wait and see”: these are frequently the comments that the media use in observing the central banks’ tendency in postponing and/or delaying interest rate decisions. The recent behavior of the Federal Reserve System (FED) is paradigmatic.

In the aftermath of the severest recession since the Second World War, the FED  faces extraordinary challenges in designing and implementing monetary policy. The overall result has been massive monetary accommodation with interest rates close to zero, coupled with an exceptional expansion of the Fed’s balance sheet. The so called Great Recession ended in June 2009, but seven years afterwards, the Fed is still delaying the process of going back to normal. Expansionary monetary policy has been implemented long after the recession ended,  raising questions  on the drivers and consequences of  monetary inertia, i.e. in this case reluctance in leaving the ultra-expansionary monetary status quo to start a policy of interest rate normalization. 

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SUERF Policy Note, No 8SUERF Policy Note, No 8

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