Monetary Policy and Behavioral Finance

42 Pages Posted: 10 Oct 2006

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

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

Keywords: Monetary policy, behavioral finance, financial markets

JEL Classification: E51, E61, G12

Suggested Citation

Hyde, Stuart and Cuthbertson, Keith and Nitzsche, Dirk, Monetary Policy and Behavioral Finance (August 2006). Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=931887 or http://dx.doi.org/10.2139/ssrn.931887

Stuart Hyde

Alliance Manchester Business School - University of Manchester ( email )

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Manchester M15 6PB
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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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