Monetary Policy under Behavioral Expectations: Theory and Experiment

Arbeitspapier

Expectations 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.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Tinbergen Institute Discussion Paper ; No. 15-087/II

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Design of Experiments: General ; Monetary Policy ; Expectations; Speculations
• Thema: Experimental Macroeconomics ; Heterogeneous Expectations ; Learning to forecast Experiment ; Trade-off Inflation and Output Gap

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Hommes, Cars ; Massaro, Domenico ; Weber, Matthias
• Ereignis: Veröffentlichung
• (wer): Tinbergen Institute
• (wo): Amsterdam and Rotterdam
• (wann): 2015

Weitere Informationen

• Handle: http://hdl.handle.net/10419/125084
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ