Bounded rationality in Keynesian beauty contests: A lesson for central bankers?

Artikel

The great recession (2008) triggered an apparent discrepancy between empirical findings and macroeconomic models based on rational expectations alone. This gap led to a series of recent developments of a behavioral microfoundation of macroeconomics combined with the underlying experimental and behavioral Beauty Contest (BC) literature, which the authors review in this paper. They introduce the reader to variations of the Keynesian Beauty Contest (Keynes, The general theory of employment, interest, and money, 1936), theoretically and experimentally, demonstrating systematic patterns of out-of-equilibrium behavior. This divergence of (benchmark) solutions and bounded rationality observed in human behavior has been resolved through stepwise reasoning, the so-called level k, or cognitive hierarchy models. Furthermore, the authors show how the generalized BC function with limited parameter specifications encompasses relevant micro and macro models. Therefore, the stepwise reasoning models emerge naturally as building blocks for new behavioral macroeconomic theories to understand puzzles like the lacking rise of inflation after the financial crisis, the efficacy of quantitative easing, the forward guidance puzzle, and the effectiveness of temporary fiscal expansion.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Economics: The Open-Access, Open-Assessment E-Journal ; ISSN: 1864-6042 ; Volume: 14 ; Year: 2020 ; Issue: 2020-16 ; Pages: 1-38 ; Kiel: Kiel Institute for the World Economy (IfW)

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; General Aggregative Models: Neoclassical ; Information, Knowledge, and Uncertainty: General ; Design of Experiments: Laboratory, Individual
• Subject: Beauty Contest game ; expectation formation ; equilibration ; level k reasoning ; behavioral macroeconomics ; game theory ; experimental economics

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mauersberger, Felix ; Nagel, Rosemarie ; Bühren, Christoph
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2020

Further information

• DOI: doi:10.5018/economics-ejournal.ja.2020-16
• Handle: http://hdl.handle.net/10419/219998
• Last update: 10.03.2025, 11:45 AM CET