Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/296157 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 11068
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
In a world of radical uncertainty the frequency distributions of economic variables deviate from the normal distribution and typically exhibit fat tails. We show that this feature is obtained in simple models where agents have cognitive limitations and fail to understand the underlying model. Although the model is simple, we obtain great complexity. We analyse the implications for monetary policy. We show that in such models the central bank bears a much greater responsibility to stabilize an otherwise unstable system than in mainstream models that assume Rational Expectations. We also question the use of impulse responses to exogenous shocks when the distribution of these impulse responses is not normal.
Subjects: 
radical uncertainty
monetary policy
JEL: 
E52
E58
E70
Document Type: 
Working Paper
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