Behavioral Economics and Fed Policymaking

Essay by Mark A. Calabria in Cato Journal: “Behavioral economics has continued to gain momentum in challenging the standard rational actor model in economics. With a few exceptions, the emphasis has been on the cognitive failure of individuals outside of government. Niclas Berggren (2013: 200) estimates that 95.5 percent of behavioral economics articles in the leading economics journals do not contain an analysis of the cognitive ability of policymakers. In this article, I offer a preliminary analysis of potential cognitive failures in the Federal Reserve’s conduct of monetary policy. Proposals to “debias” monetary policymaking are offered, along with a discussion of how the Fed’s existing institutional structure ameliorates or exasperates potential biases…(More)”