A monetary model of growth with limited foresight

Abstract

We study real and monetary growth models with households endowed with limited foresight and planning only for a finite number of periods, despite being infinitely lived (myopia). In the real model, there emerges a unique Balanced Growth Path (

) characterized by sub-optimal capital accumulation. However, by relaxing myopia, it converges to the

upper B upper G upper P B G P $BGP$

of the economy with perfect foresight. We then prove the existence of equilibria where money, even in absence of financial frictions or liquidity constraints, is positively valued and non-neutral, in contrast to usual results in infinite horizon. Specifically, there arise two monetary

upper B upper G upper P s B G P s $BGPs$

, where money is non-neutral along the first one and neutral along the second one. Eventually, we perform a global stability analysis and identify the optimal monetary policy maximizing welfare.