A Monetary Model of Growth with Limited Foresight * - Laboratoire d'économie d'Orléans
Preprints, Working Papers, ... Year : 2024

A Monetary Model of Growth with Limited Foresight *

Francesco Magris
Daria Onori

Abstract

Rational expectations are often questioned in light of their overly demanding assumptions. Thus, an increasing literature introduces some form of bounded rationality.

In this paper, we study real and monetary growth models with agents endowed with limited foresight. Accordingly, in each period, economic plans extend only for a limited number of periods and are reformulated in each subsequent date. We show that limited foresight may lead to capital under-investment and be thus growth-detrimental. However, by relaxing progressively myopia, the economy converges to the Perfect Foresight equilibrium. We prove the existence of a monetary Balanced Growth Path (BGP ) beside the non monetary one and compare it with the outcome obtained under perfect foresight. We also perform a stability analysis and show that the monetary BGP is globally unstable (stable) while the non monetary one is globally stable (unstable) when money is positive (negative). Finally, we identify the optimal monetary policy maximizing welfare. Limited foresight, in contrast to a widespread literature, thus restores monetary equilibria even in absence of limited participation, financial frictions and borrowing constraints.

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Dates and versions

hal-04702218 , version 1 (19-09-2024)

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Francesco Magris, Daria Onori. A Monetary Model of Growth with Limited Foresight *. 2024. ⟨hal-04702218⟩
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