Modeling diverse expectations in an aggregated New Keynesian Model

Kurz, Mordecai; Piccillo, Giulia; Wu, Ho-Mou

doi:10.1016/j.jedc.2013.01.016

Cited by 44 publications

(48 citation statements)

References 39 publications

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“…3 In the following we will only make use of the aggregate equations 3 Under the assumption of a representative agent holding rational expectations, this model represents the standard New Keynesian model discussed for example in Woodford (2003) and Galí (2008). Micro-founded New Keynesian models consistent with heterogeneous expectations have been derived by Branch andMcGough (2009), Kurz (2011), Kurz et al (2013) and Massaro (2013). System (1)-(3) corresponds to the model developed by augmented with demand and supply shocks, or to the model derived in Kurz (2011) and Kurz et al (2013) in which the error terms are interpreted as the deviation of the average of agents' forecasts of their individual future consumption from the average forecast of aggregate consumption and as a similar deviation of price presented here.…”

Section: Macroeconomic Modelmentioning

confidence: 58%

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Monetary Policy Under Behavioral Expectations: Theory and Experiment

2015

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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. Terms of use: Documents in AbstractExpectations play a crucial role in modern macroeconomic models. We replace the common assumption of rational expectations in a New Keynesian framework by the assumption that expectations are formed according to a heuristics switching model that has performed well in earlier work. We show how the economy behaves under these assumptions with a special focus on inflation volatility. Contrary to comparable models based on full rationality, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions with a learning to forecast experiment. The experimental results support the behavioral model and the claim that reacting to the output gap in addition to inflation can indeed lower inflation volatility.JEL classification: C90, E03, E52, D84

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Section: Macroeconomic Modelmentioning

confidence: 58%

“…Bullard and Mitra (2002), Marcet and Nicolini (2003), Guesnerie (2009, 2010, Woodford (2010), De Grauwe (2011, 2012a,b), De Grauwe and Kaltwasser (2012, Anufriev et al (2013), Kurz et al (2013), Benhabib et al (2014; see Evans and Honkapohja (2001) and Woodford (2013) for overviews).…”

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confidence: 99%

Monetary Policy Under Behavioral Expectations: Theory and Experiment

2015

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“…Microfoundations for this model when expectations are heterogeneous can be found in Hommes and Lustenhouwer (2015). The derivations in that paper largely follow Kurz et al (2013). 2…”

Section: Economic Environmentmentioning

confidence: 85%

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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“…Micro-founded New Keynesian models consistent with heterogeneous expectations have been derived by , Kurz (2011), Kurz et al (2013a) and Massaro (2013). System (3.1)-(3.3) corresponds to the model developed by augmented with demand and supply shocks, or to the model derived in Kurz (2011) and Kurz et al (2013a) in which the error terms are interpreted as the deviation of the average of agents' forecasts of their individual future consumption from the average forecast of aggregate consumption and as a similar deviation of price forecasts.…”

Section: )mentioning

confidence: 98%

“…Marimon and Sunder, 1993, Van Huyck et al, 1994, Bernasconi and Kirchkamp, 2000, Kelley and Friedman, 2002, Lei and Noussair, 2002, Arifovic and Sargent, 2003, Hommes et al, 2005b, Adam, 2007, Heemeijer et al, 2009, Davis and Korenok, 2011, Bao et al, 2012, Kryvtsov and Petersen, 2013, Cornand and M'Baye, 2013, Pfajfar and Zakelj, 2014, Assenza et al, 2014bsee Duffy, 2012, andAssenza et al, 2014a, for surveys) and on the literature on behavioral macroeconomics (in particular works that consider monetary and fiscal policy when allowing for a departure from the hypothesis of rational expectations; e.g. Bullard and Mitra (2002), Marcet and Nicolini (2003), Guesnerie (2009), Branch andMcGough (2009, 2010), Woodford (2010), De Grauwe (2011, 2012a, De Grauwe and Kaltwasser (2012), Anufriev et al (2013), Kurz et al (2013a), Benhabib et al (2014); see Evans and Honkapohja (2001) and Woodford (2013) for overviews). 33 There are many other central banks with a hierarchical mandate which makes price stability the primary objective for monetary policy, including the central banks of New Zealand, Canada, England, and Sweden.…”

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confidence: 99%

Behavioral Economics and the Public Sector

Weber

2015

SSRN Journal

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Modeling diverse expectations in an aggregated New Keynesian Model

Cited by 44 publications

References 39 publications

Monetary Policy Under Behavioral Expectations: Theory and Experiment

Monetary Policy Under Behavioral Expectations: Theory and Experiment

Managing unanchored, heterogeneous expectations and liquidity traps

Behavioral Economics and the Public Sector

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