Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to the rational model, 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 in a learning-to-forecast experiment. In line with the behavioral model, the results support the claim that output stabilization can lead to less volatile inflation.

Monetary policy under behavioral expectations: Theory and experiment / C. Hommes, D. Massaro, M. Weber. - In: EUROPEAN ECONOMIC REVIEW. - ISSN 0014-2921. - 118:N/A(2019 Sep), pp. 193-212. [10.1016/j.euroecorev.2019.05.009]

Monetary policy under behavioral expectations: Theory and experiment

D. Massaro
Secondo
;
2019

Abstract

Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to the rational model, 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 in a learning-to-forecast experiment. In line with the behavioral model, the results support the claim that output stabilization can lead to less volatile inflation.
Behavioral macroeconomics; Experimental macroeconomics; Heterogeneous expectations; Learning-to-forecast experiment
Settore SECS-P/01 - Economia Politica
Settore SECS-P/02 - Politica Economica
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/820837
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