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Dynamic predictor selection in a New Keynesian model with heterogeneous expectations. (English) Zbl 1232.91482
Summary: This paper introduces dynamic predictor selection into a new Keynesian model with heterogeneous expectations and examines its implications for monetary policy. We extend our earlier results in [J. Econ. Dyn. Control 33, No. 5, 1036–1051 (2009; Zbl 1170.91464)] by incorporating endogenous time-varying predictor proportions along the lines of W. A. Brock and C. H. Hommes [Econometrica 65, No. 5, 1059–1095 (1997; Zbl 0898.90042)]. We find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution. The qualitative nature of the non-linear dynamics turns on the interaction between hawkishness of the government’s policy and the extrapolative behavior of non-rational agents.

MSC:
91B55 Economic dynamics
91B64 Macroeconomic theory (monetary models, models of taxation)
91B69 Heterogeneous agent models
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