×

zbMATH — the first resource for mathematics

A New Keynesian model with heterogeneous expectations. (English) Zbl 1170.91464
Summary: Within a New Keynesian model, we incorporate bounded rationality at the individual agent level, and we determine restrictions on expectations operators sufficient to imply aggregate IS and AS relations of the same functional form as those under rationality. This result provides dual implications: the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers-imposing heterogeneous expectations at an aggregate level may be ill-advised; on the other hand, accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity. As an example, we consider a case where a fraction of agents are rational and the remainder are adaptive, and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity.

MSC:
91B64 Macroeconomic theory (monetary models, models of taxation)
68T05 Learning and adaptive systems in artificial intelligence
PDF BibTeX XML Cite
Full Text: DOI
References:
[1] Aiyagari, R., Uninsured idiosyncratic risk and aggregate saving, Quarterly journal of economics, 109, 3, 659-684, (1994)
[2] Aiyagari, R., Optimal capital income taxation with incomplete markets and borrowing constraints, Journal of political economy, 103, 6, 1158-1175, (1995)
[3] Amato, J.D.; Shin, H.S., Imperfect common knowledge and the information value of prices, Economic theory, 27, 213-241, (2006) · Zbl 1123.91037
[4] Benhabib, J.; Schmitt-Grohe, S.; Uribe, M., The perils of Taylor rules, Journal of economic theory, 96, 40-69, (2001) · Zbl 0981.91042
[5] Benigno, P.; Woodford, M., Inflation stabilization and welfare: the case of a distorted steady-state, Journal of the European economic association, 3, 1185-1236, (2005)
[6] Bernanke, B., 2004. The Great Moderation. Remarks by Governor Ben S. Bernanke at the meetings of the Eastern Economic Association, Washington DC, February 20, 2004.
[7] Bernanke, B.; Woodford, M., Inflation forecasts and monetary policy, Journal of money, credit, and banking, 24, 653-684, (1997)
[8] Blanchard, O.J.; Khan, C.M., The solution of linear difference models under rational expectations, Econometrica, 48, 5, 1305-1311, (1980) · Zbl 0438.90022
[9] Branch, W.A., Local convergence properties of a cobweb model with rationally heterogeneous expectations, Journal of economic dynamics and control, 27, 1, 64-85, (2002) · Zbl 1009.91012
[10] Branch, W.A., The theory of rationally heterogeneous expectations: evidence from survey data on inflation expectations, Economic journal, 114, 592-621, (2004)
[11] Branch, W.A., Sticky information and model uncertainty in survey data on inflation expectations, Journal of economic dynamics and control, 31, 1, 245-276, (2007) · Zbl 1162.91457
[12] Branch, W.A.; McGough, B., Multiple equilibria in heterogeneous expectations models, Contributions to macroeconomics. BE-press, 4, 1, (2005), (Article 12)
[13] Brock, W.A.; Hommes, C.H., A rational route to randomness, Econometrica, 65, 1059-1160, (1997) · Zbl 0898.90042
[14] Brock, W.A.; Hommes, C.H., Heterogeneous beliefs and routes to chaos in a simple asset pricing model, Journal of economic dynamics and control, 22, 1235-1274, (1998) · Zbl 0913.90042
[15] Bullard, J.M.; Mitra, K., Learning about monetary policy rules, Journal of monetary economics, 49, 1105-1129, (2002)
[16] Carlstrom, C.T.; Fuerst, T.S., Investment and interest rate policy: a discrete time analysis, Journal of economic theory, 123, 1, 4-20, (2005) · Zbl 1114.91086
[17] Carroll, C.D., The epidemiology of macroeconomic expectations, Quarterly journal of economics, 118, 1, (2003)
[18] Christiano, L.; Eichenbaum, M.; Evans, C., Nominal rigidities and the dynamic effects of a shock to monetary policy, Journal of political economy, 113, 1, 1-45, (2005)
[19] Clarida, R.; Gali, J.; Gertler, M., Monetary policy rules and macroeconomic stability: evidence and some theory, Quarterly journal of economics, 115, 147-180, (2000) · Zbl 1064.91512
[20] Evans, G.W.; Honkapohja, S., Learning and expectations in macroeconomics, (2001), Princeton University Press
[21] Evans, G.W.; Honkapohja, S., Expectations and the stability problem for optimal monetary policy, Review of economic studies, 70, 807-824, (2003) · Zbl 1180.91200
[22] Evans, G.W.; Honkapohja, S., Adaptive learning and monetary policy design, Journal of money, credit, and banking, 35, 1045-1072, (2003)
[23] Evans, G.W.; McGough, B., Monetary policy, indeterminacy, and learning, Journal of economic dynamics and control, 29, 1809-1840, (2005) · Zbl 1198.91145
[24] Evans, G., Honkapohja, S., Mitra, K., 2003. Notes on Agents’ Behavioral Rules Under Adaptive Learning and Recent Studies of Monetary Policy, Working Paper.
[25] Gali, J.; Lopez-Salido, J.D.; Valles, J., Rule of thumb consumers and the design of interest rate rules, Journal of money, credit, and banking, 36, 4, 739-764, (2004)
[26] Giannoni, M.P., Woodford, M., 2002. Optimal interest rate rules. NBER Working Papers 9419, 9420.
[27] Guse, E., Stability properties for learning with heterogeneous expectations and multiple equilibria, Journal of economic dynamics and control, 29, 1623-1647, (2005) · Zbl 1198.91160
[28] Honkapohja, S.; Mitra, K., Are non-fundamental equilibria learnable in models of monetary policy?, Journal of monetary economics, 51, 1743-1770, (2004)
[29] Honkapohja, S.; Mitra, K., Performance of monetary policy with internal central bank forecasting, Journal of economic dynamics and control, 29, 627-658, (2005) · Zbl 1202.91224
[30] Kaldor, N., Speculation and economic stability, Review of economic studies, 7, 1, 1-27, (1939)
[31] Kocherlakota, N., Implications of efficient risk sharing without commitment, Review of economic studies, 63, 4, 595-609, (1996) · Zbl 0864.90023
[32] Krusell, P.; Smith, A., Income and wealth heterogeneity in the aggregate economy, Journal of political economy, 106, 5, 867-896, (1998)
[33] Kurz, M., Beauty contests under private information and diverse beliefs: how different?, Journal of mathematical economics, 44, 762-784, (2008) · Zbl 1135.91349
[34] Lansing, K.J., 2006. Time-Varying U.S. Inflation dynamics and the new Keynesian Phillips curve. Review of Economic Dynamics, forthcoming.
[35] Lubik, T.; Schorfheide, F., Testing for indeterminacy: an application to U.S. monetary policy, American economic review, 94, 1, 190-218, (2004)
[36] Mankiw, N.G.; Reis, R., Sticky information in general equilibrium, Journal of European economic association, 5, 2-3, 603-613, (2007)
[37] Mankiw, N.G.; Reis, R.; Wolfers, J., Disagreement about inflation expectations, NBER macroeconomics annual 2003, 18, 209-248, (2003)
[38] Marcet, A.; Sargent, T.J., Convergence of least-squares learning mechanisms in self-referential linear stochastic models, Journal of economic theory, 48, 2, (1989) · Zbl 0672.90023
[39] McCallum, B.; Nelson, E., Performance of operational policy rules in an estimated semiclassical model, (), 55-119
[40] Milani, F., Expectations, learning and macroeconomic persistence, Journal of monetary economics, 54, 7, 2065-2082, (2007)
[41] Pesaran, H.M., The limits of rational expectations, (1987), Basil Blackwell, Oxford
[42] Preston, B., Learning of monetary policy rules when long horizons matter, International journal of central banking, 1, 2, 1-46, (2005)
[43] Preston, B., Adaptive learning, forecast-based instrument rules and monetary policy, Journal of monetary economics, 53, 3, 507-535, (2006)
[44] Sargent, T.J., The conquest of American inflation, (1999), Princeton University Press
[45] Schmitt-Grohe, S., Uribe, M., 2005. Optimal inflation stabilization in a medium-scale macroeconomic model. Mimeo.
[46] Shi, S., Search, inflation and capital accumulation, Journal of monetary economics, 44, 81-103, (1999)
[47] Smets, F.; Wouters, R., An estimated dynamic stochastic general equilibrium model of the euro area, Journal of the European economic association, 1, 5, 1123-1175, (2003)
[48] Svensson, L., Inflation targeting as a monetary policy rule, Journal of monetary economics, 43, 607-654, (1999)
[49] Svensson, L., Williams, N., 2005. Monetary policy with model uncertainty: distribution forecast targeting. Mimeo.
[50] Svensson, L.; Woodford, M., Implementing optimal policy through inflation-forecast targeting, ()
[51] Townsend, R.M., Forecasting the forecasts of others, Journal of political economy, 91, 4, 546-588, (1983)
[52] Walsh, C.E., Monetary theory and policy, (2003), MIT Press Cambridge
[53] Weder, M., Near-rational expectations models in animal spirits models of aggregate fluctuations, Economic modeling, 21, 249-265, (2004)
[54] Woodford, M., Optimal monetary policy inertia, The Manchester school (suppl.), 67, 1-35, (1999)
[55] Woodford, M., Imperfect common knowledge and the effects of monetary policy, ()
[56] Woodford, M., Interest and prices, (2003), Princeton University Press
[57] Woodford, M., 2006. Rules for Monetary Policy, in: NBER Reporter: Research Summary.
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.