The global economy has gone through several serious crises in recent years: a pandemic, war and very high inflation. The underlying causes as well as the sequence of events are very different from previous crises such as the dotcom crisis, the financial crisis and the euro crisis. Nevertheless, the effects on the economy have been very large and have led to extensive monetary and fiscal policy measures to address them.

It is well known that economic analysis is more difficult when the economy is hit by major shocks. The developments of recent years, characterised by major economic fluctuations and behavioural changes, have been particularly difficult to capture with the models and analyses normally used by central banks. This Economic Commentary examines whether research in behavioural economics can usefully complement standard macroeconomic models to improve analysis and decision-making in monetary policy.

How central banks conduct monetary policy and what their objectives should be are based on an interaction between practical experience and economic research. For example, some of the recipients of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, often referred to as the Economics Prize, have been rewarded for key findings: the relationship between inflation and unemployment, what the objective of monetary policy should be, and the position of the central bank in relation to the political system.^[2] See for example Heikensten (2005) and Ingves (2015) for a description.

The standard macroeconomic models commonly used by central banks, which build on the above-mentioned research, are based on the assumption that households and other economic decision-makers are rational and forward-looking and aim to maximise their own utility. This is usually described as the assumption about the economic man or homo economicus.

Behavioural economics integrates insights from psychology with economics. The subject has been honoured with two Economics Prizes, to Daniel Kahneman in 2002 and Richard Thaler in 2017.^[3] The Prize awarded to Kahneman in 2002 was shared with Vernon Smith, who was honoured for his research on experimental economics; see Royal Swedish Academy of Sciences (2002). Kahneman passed away a few weeks ago at the age of 90. In addition, several other laureates have focused on the subject later in their careers, such as George Akerlof and Robert Shiller.^[4] See Akerlof and Shiller (2009). The monetary policy discussion among central banks has sometimes highlighted the reasoning of behavioural economics that economic agents are driven by psychological factors and may have different preferences than those assumed by standard macroeconomic models, while these preferences may in turn differ among different agents.^[5] See, for example, Yellen (2007), Haldane (2014) and Byrne et al (2022).

This Economic Commentary aims to provide some ideas on how empirical research from behavioural economics could help explain economic developments in recent years, particularly in relation to the large increase in inflation. We also discuss why it may be important to consider this research to improve future analysis when designing monetary policy. The first part of the Commentary describes some of the key findings from behavioural economics research. In this context, we will also discuss insights from social psychology that are important to consider in the context of group decision-making. The second part describes a simple monetary policy framework. The third part focuses on the inflation shock in 2021 and 2022 and its consequences going forward. We end the Commentary with some concluding thoughts.