Macroeconomic implications of behavioural finance theories

ap Gwilym, Rhys 2009. Macroeconomic implications of behavioural finance theories. PhD Thesis, Cardiff University.

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Abstract

In this thesis I consider the extent to which macroeconomic theory and policy evaluation should be based upon behavioural models of human decision making. I review the literature on decision making, and contrast it with the rational paradigm on which economic modelling is traditionally predicated. I also review that part of the macroeconomic literature which is based, explicitly or implicitly, on behavioural theories. I develop a model of behavioural decision making in which investors base their portfolio decision on a choice between two simple heuristical forecasting rules. By simulating the model, I conclude that it can account for the observed history of the FTSE All-Share Index. By comparing this result with the ability of rational expec tations models to account for historical asset prices, I conclude that behavioural theories of decision making do have a useful role in explaining macroeconomic time series. Given that sub-rationality is important in helping to explain the macroecon- omy, the question then arises as to whether there is scope for policy to correct for the misallocation of resources that is caused by this irrationality. I introduce the heuristical decision making model into a wider dynamic stochastic general equilibrium model of the entire economy. This allows me to assess whether using monetary policy to target asset price misalignments can enhance welfare. I find that in my particular model, a counter-intuitive 'running with the wind' monetary policy could enhance welfare. This result is clearly specific to the specification of decision making that I use, and runs counter to other intuitive arguments in favour of a 'leaning against the wind' policy. I, therefore, conclude that a system atic monetary policy response to asset mis-pricing is unlikely to enhance welfare.

Item Type:	Thesis (PhD)
Status:	Unpublished
Schools:	Business (Including Economics)
ISBN:	9781303189487
Date of First Compliant Deposit:	30 March 2016
Last Modified:	16 Oct 2014 13:31
URI:	https://orca.cardiff.ac.uk/id/eprint/55850

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