7. GETTING RID OF BOTH BIASES?

We so far assumed that individuals only differ with respect to β, the weight of income in their utility function. Regarding desired income Y^d we considered all individuals the same. Therefore, we did not and could not manipulate this parameter in our quest for the socially optimal monetary policy design.

The justification for assuming that desired income is strictly greater than potential income for all individuals is based on the observation that virtually all countries suffer from involuntary unemployment at potential income. Causes of this are market imperfections, including monopoly power and distortive taxes.

Potential income in a perfectly competitive economy would be much higher. Hence, everybody wants income to be higher than current potential income.


	Copyright 2003-2004, Manfred Gärtner. All rights reserved.