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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.

91B64 Macroeconomic theory (monetary models, models of taxation)
68T05 Learning and adaptive systems in artificial intelligence
Full Text: DOI
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