2016
DOI: 10.1016/j.jedc.2016.10.003
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Optimal monetary policy in a New Keynesian model with heterogeneous expectations

Abstract: In a world where expectations are heterogeneous, what is the design of the optimal policy? Are canonical policies robust when heterogeneous expectations are considered or would they be associated with large welfare losses? We aim to answer these questions in a stylized simple New Keynesian model where agents'beliefs are not homogeneous. Assuming that a fraction of agents can form their expectations by some adaptive or extrapolative schemes, we focus on an optimal monetary policy by second-order approximation o… Show more

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Cited by 33 publications
(27 citation statements)
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“…11 9 This section aims to give an insight on the model. All details about its derivation and micro-foundations can be found in Branch and McGough (2009) or Di Bartolomeo et al (2016). The same framework, and results, can be also obtained by assuming homogeneous agents who form their expectations by a near-rational mechanism theorized by, e.g., Bom…m and Diebold (1997), Ball (2000) or Weder (2004).…”
Section: The He-dsge Modelmentioning
confidence: 87%
“…11 9 This section aims to give an insight on the model. All details about its derivation and micro-foundations can be found in Branch and McGough (2009) or Di Bartolomeo et al (2016). The same framework, and results, can be also obtained by assuming homogeneous agents who form their expectations by a near-rational mechanism theorized by, e.g., Bom…m and Diebold (1997), Ball (2000) or Weder (2004).…”
Section: The He-dsge Modelmentioning
confidence: 87%
“…This section discusses the standard New Keynesian behavioural model framework used by Jang and Sacht (2012), Jang and Sacht (2014), De Grauwe (2012a), De Grauwe (2012b), Branch and McGough (2010), Massaro (2013), Cornea et al (2014), Di Bartolomeo et al (2016) and others.…”
Section: The Standard Nk Behavioural Modelmentioning
confidence: 99%
“…The parameter can be interpreted as a measure of the credibility of the central bank's in ‡ation target with = 1 indicating full credibility of the target, = 0 representing the case of no credibility, and 0 < < 1 indicating partial credibility.21 The parameter can be more also de…ned as the fraction of agents that do believe in the central bank's in ‡ation target while (1 ) is the fraction of agents that do not …nd monetary policy credible and rely on adaptive expectations to form their predictions about future in ‡ation. This speci…cation is related to a growing literature on the role of heterogenous beliefs in the New Keynesian model(Lansing (2009),Assenza et al (2013), DiBartolomeo et al (2016),Gibbs (2017), and Pecora and Spelta (2017)).…”
mentioning
confidence: 92%