Stabilization policies in a behavioral macroeconomics model

Articles in Press

Document Type : Research Paper

Author

Faculty of Economics, University of Tehran, Tehran, Iran.

Abstract

he relationship between inflation and output (or unemployment) has been a contentious topic historically and remains so today. A pivotal point in this discussion is the Friedman-Phelps hypothesis, which posits that there is no long-term relationship between the two. This idea has gained acceptance among many economists, yet doubts about it persist. Additionally, the trade-off between the variability of inflation and output has garnered attention. Within the framework of DSGE models, stabilizing output leads to greater variability in inflation, and similarly, stabilizing inflation results in greater variability in output. In other words, there is a trade-off between stabilizing output and inflation.

In this context, we explore whether, in addition to the negative relationship between the variability of inflation and output, a positive relationship might also exist. The results obtained in this study indicate that within a behavioral macroeconomic model, it is possible for a positive relationship between the variability of inflation and output to emerge. Furthermore, for the Iranian economy, the results show that the relationship between the variability of inflation and output aligns well with the results of the behavioral macroeconomic model. The policy implication of these findings is that it is possible to simultaneously reduce the variability of both inflation and output.

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Main Subjects

Journal of Economic Research (Tahghighat- E- Eghtesadi)

Articles in Press, Accepted Manuscript
Available Online from 10 May 2025

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History

  • Receive Date: 16 June 2024
  • Revise Date: 20 February 2025
  • Accept Date: 10 May 2025

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