Monetary Policy and Behavioral Finance

35 Pages Posted: 17 Oct 2007

See all articles by Stuart Hyde

Stuart Hyde

Alliance Manchester Business School - University of Manchester

Keith Cuthbertson

City University London - Sir John Cass Business School

Dirk Nitzsche

City University London - Sir John Cass Business School

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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, behavioral 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 behavior 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 behavior of agents, which has been reinforced by insights from behavioral finance.

Suggested Citation

Hyde, Stuart and Cuthbertson, Keith and Nitzsche, Dirk, Monetary Policy and Behavioral Finance. Journal of Economic Surveys, Vol. 21, No. 5, pp. 935-969, December 2007, Available at SSRN: https://ssrn.com/abstract=1021836 or http://dx.doi.org/10.1111/j.1467-6419.2007.00525.x

Stuart Hyde

Alliance Manchester Business School - University of Manchester ( email )

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Keith Cuthbertson (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Dirk Nitzsche

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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