In this Economic Commentary, we have highlighted insights from behavioural economics research that we believe can be helpful for monetary policy. We see these insights as useful complements to the existing analysis and standard macroeconomic models. In many cases, they can offer alternative explanations for the relationships we observe. One example is the strong relationship of consumption with changes in income. It can be explained by the reaction of rational individuals to borrowing constraints or psychological factors such as present bias. Most likely, individuals are different, some are constrained by borrowing restrictions, and others are more present- biased in their financial decisions.

A further example is the strong relationship between inflation expectations and actual inflation when inflation is high. This can be the result of rational inattention or psychological rules of thumb. Again, there are likely to be differences between individuals, with some fitting better into one or the other of these explanations. In recent years, new research has attempted to integrate behavioural economic elements into macroeconomic models in order to draw conclusions that are more general about, for example, the effects of fiscal and monetary policy.^[51] For an early overview, see Driscoll and Holden (2014). For more recent studies, see for example Laibson et al. (2024).

We see a number of possible practical measures to integrate behavioural economic insights into the monetary policy analysis and decision-making process. One possible measure is to supplement the ongoing model analysis with insights from behavioural economics. A particularly interesting way forward could be to link behavioural economic results with models and analyses that include different types of households, or ‘heterogeneous agents’.

What can be done to avoid social psychological pitfalls in the actual drafting and decision-making process? There are several well-known approaches to solving the problems of groupthink. ^[52] See Janis (1982). The methods are essentially about actively opening up to critical thinking. Applied to the monetary policy process, the interaction between staff and committee should be characterised by openness to alternative solutions and views. When it comes to the committee's own decision-making process, it is important to make use of the different backgrounds and experiences of its members and to encourage open conversations. Reservations against decisions should not be seen as a sign of frictions but rather as a sign of good discussions.