This paper compares the effectiveness of the monetary policy based on conventional utility function and prospect theory. According to prospect theory, in the face of uncertainty, people make decisions based onperceived losses and benefits, so they are more sensitive to losses than to gains of equal size. Achieving this goal, we estimated the DSGE Model for the Iranian economy. The results of Bayesian estimation showed that under prospect theory, the inclusion of the loss-aversion component affects the household consumption behavior, the labor supply, and the real money demand. Also, The resultsof the Impulse-Response analysis show that an expansionary monetary shock led to an overestimate of inflation expectations due to fear of losses resulting from rising inflation. Hence, under the prospect theory, inflation increases relatively more, and the interest rate decreases with less intensity. Moreover, the more attention to the behavior of loss-aversion agents by policymakers, the less volatility is in macroeconomic variables.
Erfani, A., & Talebbeydokhti, A. (2023). Should the Loss-aversion Behavior be Significant for Central Bankers? Evidence from Behavioral Economics. Iranian Economic Review, 27(3), 823-853. doi: 10.22059/ier.2023.324995.1007173
MLA
Alireza Erfani; Azadeh Talebbeydokhti. "Should the Loss-aversion Behavior be Significant for Central Bankers? Evidence from Behavioral Economics". Iranian Economic Review, 27, 3, 2023, 823-853. doi: 10.22059/ier.2023.324995.1007173
HARVARD
Erfani, A., Talebbeydokhti, A. (2023). 'Should the Loss-aversion Behavior be Significant for Central Bankers? Evidence from Behavioral Economics', Iranian Economic Review, 27(3), pp. 823-853. doi: 10.22059/ier.2023.324995.1007173
VANCOUVER
Erfani, A., Talebbeydokhti, A. Should the Loss-aversion Behavior be Significant for Central Bankers? Evidence from Behavioral Economics. Iranian Economic Review, 2023; 27(3): 823-853. doi: 10.22059/ier.2023.324995.1007173