Optimal term length for an overconfident central banker

Abstract : This paper discusses the implications of overconfidence when it affects a monetary policy maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Incorporating them into a standard New Keynesian framework, we consider the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should always be lengthened when these two types of biases increase by the same percentage magnitude.
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Submitted on : Tuesday, June 6, 2017 - 3:43:53 PM
Last modification on : Thursday, April 11, 2019 - 9:25:01 AM

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Etienne Farvaque, Norimichi Matsueda. Optimal term length for an overconfident central banker. The Singapore Economic Review, 2017, 62 (01), pp.179--192. 〈10.1142/s0217590816500107〉. 〈hal-01533519〉

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