Managing self-organization of expectations through monetary policy: A macro experiment

Assenza, Tiziana; Heemeijer, Peter; Hommes, Cars; Massaro, Domenico

doi:10.1016/j.jmoneco.2019.12.005

Cited by 86 publications

(90 citation statements)

References 35 publications

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“…Cornand and Heinemann (2019) show that in a New Keynesian framework, monetary policy obeying the Taylor principle decreases the degree of complementarity between pricing decisions of firms and even turns them into strategic substitutes if its effect on aggregate demand is sufficiently strong. In a similar vein,Assenza et al (2019) show through their New Keynesian LtFEs that the Taylor principle with sufficiently strong interest rate rule (ξ π = 1.5 in their experiment) manages convergence to the forward stable solution.40Cooper et al (2017) test this argument in an auxiliary treatment and find that the main results are qualitatively unchanged. In the light of this result, the question of matching scheme should be less of a concern.…”

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confidence: 83%

Learning to Deal With Repeated Shocks Under Strategic Complementarity: An Experiment

2020

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Experimental evidence shows that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements. Under identical shocks, however, repetition allows adaptive learning, so that inertia in adjustment should fade away with experience. If this finding proves to be robust, inertia in adjustment may be irrelevant among experienced agents. The conjecture in the literature is that inertia would still persist, perhaps indefinitely, in the presence of real-world complications such as nonidentical shocks. Herein, we empirically test the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical. For both identical and nonidentical shocks, we find persistent inertia and similar patterns of adjustment that can be explained by backwardlooking expectation rules. A reformulation of naïve expectations with similarity-based learning approach is found to have a higher predictive power than rational and trend-following rules.

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confidence: 83%

Learning to Deal With Repeated Shocks Under Strategic Complementarity: An Experiment

2020

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“…Moreover, expectations in survey data typically consist of round numbers. This reflects the realistic feature that people do not come up with expectations with infinitely many decimals, but instead prefer round numbers (see Curtin (2010) for a discussion of this phenomenon labeled "digit preference" with regard to the Michigan Surveys of Consumers and, e.g., Assenza et al (2014) for the same finding in laboratory experiments with human subjects).…”

Section: Introductionmentioning

confidence: 99%

Unanchored Expectations: Self-Reinforcing Liquidity Traps and Multiple Steady States

Lustenhouwer

2019

Macroecon. Dynam.

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We study a New Keynesian model with bounded rationality, where agents choose their expectations heterogeneously from a discrete choice set. The range of their set of possible expectation values can be interpreted as the anchoring of expectations. In the model, multiple locally stable steady states can arise that reflect coordination on particular expectation values. Moreover, bad shocks to the economy can trigger a self-reinforcing wave of pessimism, where the zero lower bound on the nominal interest rate becomes binding, and agents coordinate on a locally stable liquidity trap steady state. When we let the anchoring of expectations evolve endogenously, it turns out that the anchoring of expectations at the time the bad shocks hit the economy is crucial in determining whether the economy can recover from the liquidity trap. Finally, we find that a higher inflation target makes it less likely that self-reinforcing liquidity traps arise.

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“…Mankiw et al (2003); Carroll (2003); Andrade et al (2014)) and laboratory experiments with human subjects (e.g. Pfajfar and Zakelj (2011); Assenza et al (2014)) show that in practice there exists considerable heterogeneity in the forecasts of macroeconomic variables.…”

Section: Introductionmentioning

confidence: 99%

“…This discreteness in expectation formation reflects that, in practice, people do not report expectations with infinitely many decimals, but instead prefer round numbers (see e.g. Assenza et al (2014)). 1 In this model, the anchoring of expectations, which is given by the number of expectation types (and hence the highest and lowest expectation values that agents consider), is allowed to vary endogenously with past absolute deviations from target in the economy.…”

Section: Introductionmentioning

confidence: 99%

Managing unanchored, heterogeneous expectations and liquidity traps

Hommes

Lustenhouwer

2019

Journal of Economic Dynamics and Control

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. AbstractWe study the possibility of (almost) self-fulfilling waves of pessimism and selfreinforcing liquidity traps in a New Keynesian model with heterogeneous expectations. We explicitly focus on the "anchoring" of expectations that is modeled as the range of deviations from the central bank targets (and from the rational expectation equilibrium) that agents are willing to consider. We find that when the zero lower bound on the nominal interest rate is not binding, aggressive monetary policy can prevent waves of pessimism and exclude near unit root dynamics, even when expectations are unanchored. However, as shocks bring the economy to a situation with a binding zero lower bound, there is a danger of a long lasting self-reinforcing liquidity trap that arises because of the existence of multiple steady states. It turns out that in a model where the anchoring of expectations evolves endogenously, the anchoring of expectations at the time the bad shocks hit is crucial in determining whether the economy can recover from the liquidity trap. Furthermore, a higher inflation target reduces the probability that self-reinforcing liquidity traps arise. JEL Classification: E52, E32, C62

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Managing self-organization of expectations through monetary policy: A macro experiment

Cited by 86 publications

References 35 publications

Learning to Deal With Repeated Shocks Under Strategic Complementarity: An Experiment

Learning to Deal With Repeated Shocks Under Strategic Complementarity: An Experiment

Unanchored Expectations: Self-Reinforcing Liquidity Traps and Multiple Steady States

Managing unanchored, heterogeneous expectations and liquidity traps

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