A Tentative Behavioral Approach to Real Income Targeting

Abstract

This is a paper based on cognitive psychology’s view of “curvilinear” optimism-pessimism and hence, with 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 the rational expectations of the big socioeconomic elite. This model is combined with the general-public’s view of the economy, which is assumed to be an extrapolation of the changing psychology of the community about the banking system. An exogenous shock will be propagated through this mass psychology. Policy-wise, the public sector is assumed away and the only purpose of the monetary authority is to secure the efficiency of intergenerational income distribution in a business environment with zero steady-state profit. Within this context, monetary policy is found to be in the spirit of the Old Chicago quantity theory from the viewpoint that is should be subject to a full-employment-wage standard in a gold-standard fashion. It is a countercyclical policy and not a version of the modern revival of inflation targeting, which is of the sort held responsible for the 1929 Crash.