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B Robustness check
This section presents our results under the alternative model and myopia calibrations.
The views expressed in this paper are those of the authors and do not necessarily represent the views of the Bank of Israel or the International Monetary Fund. The authors thank Itai Agur, Olivier Blanchard, Mátyás Farkas, Jorge Ivan Canales Kriljenko, Xavier Gabaix, Lars Peter Hansen, Ori Heffetz, Seppo Honkapohja, Doron Kliger, Subir Lall, Luca Onorante, Johannes Pfeifer, John Roberts, Guy Segal, Michel Strawczynski, participants at the 2nd CEPR MMCN Annual Conference at Stanford University, and participants at the Hebrew University of Jerusalem, the Bank of Israel, the Bank of Finland and the Bucharest University of Economic Studies research seminars for their useful comments.
The terms myopia, inattention, and bounded rationality are used interchangeably in this paper.
As Stiglitz (2011) notes, one crucial underlying assumption of the traditional models is rational behavior of the economy, but the real-world economy seems inconsistent with any model of rationality.
Our framework assumes the central bank behaves rationally. By optimizing behavioral agents, for our research question, a behavioral central bank is not necessary.
Here, bounded rationality means an agent's myopia to variables of interest in its decisionmaking. The plausibility of this approach finds its roots in the work of Kahneman (1973), who attributes attention to effort and inattention, by deduction, to laziness. Consequently, it is more convenient to model Homo sapiens as myopic agents. The key novelty of this paper, that agents can be myopic about specific economic variables, is discussed in Section 3.1.
While our qualitative results do not hinge on this assumption, it modifies the amplitude of the interest rate responses to shocks.
Normative analysis with exogenous myopia parameters is made possible by relying on the local rigidity property explained in Section 3.1.
The function f may contain technological shocks, fiscal measures, etc.
As presented below, this elasticity plays an essential role in the Phillips curve (Eq. 15). Decreasing return to scale also allows us to provide complete robustness checks (Appendix B.1).
See Appendix A.1 for the definition of this subjective expectation operator.
See Appendix A.2 for detailed derivations.
By extension, as it proportionally enters r;,, we recall this marginal cost myopia an output gap myopia.
The formal definitions of wx and wπ are available in Section 3.3.
See Appendix A.4 for technical details.
In this section, because FOCs with respect to consumption are considered, the labor supply (Nt) is omitted.