Monetary Policy Rules under Bounded Rationality

We study the welfare performance of various simple monetary policy rules under bounded rationality (BR) along the lines of Gabaix (2020) in a New Keynesian model with sticky wages and an effective lower bound (ELB) on interest rates. Policy strategies with a strong history dependence lose their advantage over inflation targeting in mitigating a demand-driven recessions when interest rates are constrained by the ELB. For supply shocks, inflation targeting outperforms history-dependent rules for a sufficiently high degree of BR. An exponential average inflation targeting rule, which features a variable degree of history dependence, performs remarkably well, independent of the degree of BR