This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behavior, that such inertial policy can be optimal. The...

Traditional decision theory assumes that people respond to the exact features of the options available to them, but observed behavior seems much less precise. This review considers ways of introducing imprecision into models of economic decision making, and stresses the usefulness of analogies...