Firms' rational expectations, workers' psychology, and monetary policy in a behavioral real business cycle model

This paper is based on cognitive psychology's view of “curvilinear” optimism-pessimism and hence, contains a flavor of behavioral macroeconomics. The substructure of a real overlapping-generations business cycle model is assumed to be underlined by the long-term character of firms' rational expectations. This model is combined with the workers' “bell-shaped” optimism-pessimism about a fractional-reserve-banking economy. An exogenous shock will be propagated through this workers' psychology. Policy-wise, the public sector is ignored and the only purpose of the monetary authority is to secure the efficiency of intergenerational income distribution in a business environment with zero full-employment general-equilibrium profit. Within this context, monetary policy is found to be in the spirit of the Old Chicago quantity theory in that monetary expansion is anti-recessionary, and the increase of the reserve ratio is shown to be anti-inflationary. It is a viewpoint with Chartalist flavor.