How can behavioral economics influence macroeconomic policy?
Behavioral economics is potentially valuable in a number of areas. When the Fed lowers interest rates, for example, the additional liquidity interjected into the economy will stimulate the economy more if price-setters do not simply mark up their prices in response. Understanding how agents set prices is currently an active area of macroeconomic research. Behavioral economics explores the information problems and decision biases of individual agents, including price-setters, and can therefore be helpful in understanding the effects of Fed policy. Additionally, about two-thirds of the economy is accounted for by private consumption. Behavioral research has been very active in determining how people actually make consumption decisions, which is potentially useful in charting how the economy will behave in the future.
