Download or read book A Behavioral Heterogeneous Agent New Keynesian Model written by Oliver Pfäuti and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a New Keynesian model with household heterogeneity and bounded rationality in the form of cognitive discounting. The interaction of household heterogeneity and bounded rationality generates amplification of monetary and fiscal policy through indirect general equilibrium effects while simultaneously ruling out the forward guidance puzzle and remaining stable at the effective lower bound. Thus, the model can account for recent empirical findings on the transmission mechanisms and effectiveness of monetary and fiscal policy. When abstracting from either household heterogeneity or bounded rationality the model fails to do so. Our framework nests a broad range of existing models, none of which can be consistent with all these empirical facts simultaneously. According to our model, central banks have to increase interest rates more strongly than in the rational model after an inflationary supply shock to fully stabilize inflation. While fully stabilizing inflation keeps output at potential, higher real interest rates mainly benefit wealthy households and increase the cost of government debt, leading to a substantial increase in government debt and inequality. Our model thus indicates a more pronounced trade off between aggregate efficiency and price stability on one hand, and distributional consequences and fiscal sustainability on the other hand.

Download or read book Average Inflation Targeting in a Behavioral Heterogeneous Agent New Keynesian Model written by Frantisek Masek and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the optimal window length in the average inflation targeting rule within a Behavioral THANK model of Pfäuti and Seyrich (2022). The central bank faces an occasionally binding effective lower bound (ELB) or persistent supply shocks and can also use quantitative easing when we merge Pfäuti and Seyrich (2022) with Sims et al. (2020). We show that the optimal averaging period is infinitely long in the case of a conventional degree of myopia. However, finite yet long-lasting window lengths dominate for a higher cognitive discounting. We solve the model locally and globally to disentangle the effects of uncertainty about hitting the ELB in the future, leading to a downward inflation bias in the case of the global solution. Given the solution technique, the welfare loss difference is considerably decreasing in the degree of history dependence.Appendix available https://ssrn.com/abstract=4359563.

Download or read book A Behavioral New Keynesian Model written by Xavier Gabaix and published by . This book was released on 2016 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or \helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduce its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model helps solve the “forward guidance puzzle”: the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation: because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands “nominal GDP targeting”; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic forms. (vi) The model is “neo-Fisherian” in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by the empirical evidence.

Download or read book Income Distribution and Shock Transmission written by Katrin Heinrichs and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Our very simple two agent New Keynesian model is highly stylised. It consists of an entrepreneur, who owns the economies' firms, consumes and saves, but does not work (or does not receive wage income), while the worker consumes and works, but cannot save. The allocation of the ability to save only to entrepreneurs instead of only workers differentiates our model from the only similarly simple model we are aware of Broer et al. (2016). As opposed to Broer et al. (2016), who additionally require the introduction of sticky wages in their saving-worker-nonsaving-entrepreneur-model we find that our heterogeneous agent version gives qualitatively quite similar impulse responses to a monetary policy shocks already in the baseline version with sticky-prices only. Quantitatively, the response of monetary policy is weaker in the heterogeneous agent model, hinting at the importance of (the correct representation of) heterogeneity for the transmission of monetary policy. Additionally, the model allows to consider distributional effects in the wake of a shock. They appear to be in line with empirics for monetary and preference shocks.

Download or read book Lectures on Behavioral Macroeconomics written by Paul De Grauwe and published by Princeton University Press. This book was released on 2012-10-14 with total page 147 pages. Available in PDF, EPUB and Kindle. Book excerpt: In mainstream economics, and particularly in New Keynesian macroeconomics, the booms and busts that characterize capitalism arise because of large external shocks. The combination of these shocks and the slow adjustments of wages and prices by rational agents leads to cyclical movements. In this book, Paul De Grauwe argues for a different macroeconomics model--one that works with an internal explanation of the business cycle and factors in agents' limited cognitive abilities. By creating a behavioral model that is not dependent on the prevailing concept of rationality, De Grauwe is better able to explain the fluctuations of economic activity that are an endemic feature of market economies. This new approach illustrates a richer macroeconomic dynamic that provides for a better understanding of fluctuations in output and inflation. De Grauwe shows that the behavioral model is driven by self-fulfilling waves of optimism and pessimism, or animal spirits. Booms and busts in economic activity are therefore natural outcomes of a behavioral model. The author uses this to analyze central issues in monetary policies, such as output stabilization, before extending his investigation into asset markets and more sophisticated forecasting rules. He also examines how well the theoretical predictions of the behavioral model perform when confronted with empirical data. Develops a behavioral macroeconomic model that assumes agents have limited cognitive abilities Shows how booms and busts are characteristic of market economies Explores the larger role of the central bank in the behavioral model Examines the destabilizing aspects of asset markets

Download or read book Robust Optimal Policies in a Behavioural New Keynesian Model written by and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces model uncertainty into a behavioral New Keynesian DSGE framework and derives robust optimal monetary policies. We build a heterogeneous agents DSGE model, where a fraction of agents behave according to some forms of bounded rationality (boundedly rational agents), while the reminder operate on the basis of expectations that are corrected on average (rational agents). We consider two potential mechanisms of expectations formation to generate beliefs. The central bank observes the aggregate economic dynamics, but it ignores the fraction of boundedly rational agents and/or the mechanism they use to form their expectations. Non-Bayesian robust control techniques are then adopted to minimize a welfare loss derived from the second-order approximation of agents' utilities. We account of model uncertainty considering both commitment and discretion regime.

Download or read book Behavioral Learning Equilibria in New Keynesian Models written by Cars H. Hommes and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce behavioral learning equilibria (BLE) into a multi-variate linear framework and apply it to New Keynesian DSGE models. In a BLE, boundedly rational agents use simple but optimal first-order autoregressive (AR(1)) forecasting rules whose parameters are consistent with the observed sample mean and autocorrelation of past data. We study the BLE concept in a standard three-equation New Keynesian model and develop an estimation methodology for the canonical Smets and Wouters (2007) model. A horse race between rational expectations equilibrium (REE), BLE and constant gain learning models shows that the BLE model outperforms the REE benchmark and is competitive with constant gain learning models in terms of in-sample and out-of-sample fitness. Sample autocorrelation learning of optimal AR(1) beliefs provides the best fit when short-term survey data on inflation expectations are considered in the estimation. As a policy application, we show that optimal Taylor rules under AR(1) expectations inherit history dependence, requiring a lower degree of interest rate smoothing than REE.

Download or read book Optimal Monetary Policy Under Bounded Rationality written by Jonathan Benchimol and published by International Monetary Fund. This book was released on 2019-08-02 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.

Download or read book Agent Based Models in Economics written by Domenico Delli Gatti and published by Cambridge University Press. This book was released on 2018-03-22 with total page 261 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first step-by-step introduction to the methodology of agent-based models in economics, their mathematical and statistical analysis, and real-world applications.

Download or read book Putting the New Keynesian Model to a Test written by Roland Straub and published by International Monetary Fund. This book was released on 2006-05 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, the success of these models in reproducing the dynamic behavior of an economy following structural shocks is still disputed. This paper attempts to shed light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology, and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle models, the latter indicates the relevance of accelerator effects, as described by earlier Keynesian models. We also show that NK DSGE models might overemphasize the contribution of cost-push shocks to business cycle fluctuations while, at the same time, underestimating the importance of other shocks such as changes to technology and investment adjustment costs.

Download or read book Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems written by Cars Hommes and published by Cambridge University Press. This book was released on 2013-01-24 with total page 273 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recognising that the economy is a complex system with boundedly rational interacting agents, applies complexity modelling to economics and finance.

Download or read book Handbook of Computational Economics written by Leigh Tesfatsion and published by Elsevier. This book was released on 2006-05-15 with total page 905 pages. Available in PDF, EPUB and Kindle. Book excerpt: The explosive growth in computational power over the past several decades offers new tools and opportunities for economists. This handbook volume surveys recent research on Agent-based Computational Economics (ACE), the computational study of economic processes modeled as dynamic systems of interacting agents. Empirical referents for "agents" in ACE models can range from individuals or social groups with learning capabilities to physical world features with no cognitive function. Topics covered include: learning; empirical validation; network economics; social dynamics; financial markets; innovation and technological change; organizations; market design; automated markets and trading agents; political economy; social-ecological systems; computational laboratory development; and general methodological issues. *Every volume contains contributions from leading researchers *Each Handbook presents an accurate, self-contained survey of a particular topic *The series provides comprehensive and accessible surveys

Download or read book NBER Macroeconomics Annual 2017 written by Martin Eichenbaum and published by University of Chicago Press Journals. This book was released on 2018-05-22 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volume 32 of the NBER Macroeconomics Annual features six theoretical and empirical studies of important issues in contemporary macroeconomics, and a keynote address by former IMF chief economist Olivier Blanchard. In one study, SeHyoun Ahn, Greg Kaplan, Benjamin Moll, Thomas Winberry, and Christian Wolf examine the dynamics of consumption expenditures in non-representative-agent macroeconomic models. In another, John Cochrane asks which macro models most naturally explain the post-financial-crisis macroeconomic environment, which is characterized by the co-existence of low and nonvolatile inflation rates, near-zero short-term interest rates, and an explosion in monetary aggregates. Manuel Adelino, Antoinette Schoar, and Felipe Severino examine the causes of the lending boom that precipitated the recent U.S. financial crisis and Great Recession. Steven Durlauf and Ananth Seshadri investigate whether increases in income inequality cause lower levels of economic mobility and opportunity. Charles Manski explores the formation of expectations, considering the efficacy of directly measuring beliefs through surveys as an alternative to making the assumption of rational expectations. In the final research paper, Efraim Benmelech and Nittai Bergman analyze the sharp declines in debt issuance and the evaporation of market liquidity that coincide with most financial crises. Blanchard’s keynote address discusses which distortions are central to understanding short-run macroeconomic fluctuations.

Download or read book Behavioural Macroeconomics written by Paul De Grauwe and published by . This book was released on 2019-10-17 with total page 273 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern macroeconomics has been based on the paradigm of the rational individual capable of understanding the complexity of the world. This has created a very shallow theory of the business cycle in which nothing happens in the macroeconomy unless shocks occur from outside. Behavioural Macroeconomics: Theory and Policy uses a different paradigm. It assumes that individual agents experience cognitive limitations preventing them from having rational expectations. Instead these individuals use simple rules of behaviour. Behavioural Macroeconomics introduces rationality by allowing individuals to learn from their mistakes and to switch to the rules that perform better. It introduces the idea of endogenously generated "animals spirits" that drive the business cycle and are in turn influenced by it, and applies this model to shed new light on a number of important issues. It analyses the role of fiscal policy in stabilizing the economy while maintaining debt sustainability; expands the model to include a banking sector and show how banks amplify the booms and busts; and explains how animal spirits help to synchronize the business cycles across countries. The model set out in Behavioural Macroeconomics leads to very different policy implications from the mainstream macroeconomic model. It shows how policymakers have a responsibility to stabilize an otherwise unstable system.

Download or read book New Keynesian Model Dynamics Under Heterogeneous Expectations and Adaptive Learning written by Martin Fukač and published by . This book was released on 2006 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems written by Cars Hommes and published by Cambridge University Press. This book was released on 2013-01-24 with total page 273 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recognising that the economy is a complex system with boundedly rational interacting agents, the book presents a theory of behavioral rationality and heterogeneous expectations in complex economic systems and confronts the nonlinear dynamic models with empirical stylized facts and laboratory experiments. The complexity modeling paradigm has been strongly advocated since the late 1980s by some economists and by multidisciplinary scientists from various fields, such as physics, computer science and biology. More recently the complexity view has also drawn the attention of policy makers, who are faced with complex phenomena, irregular fluctuations and sudden, unpredictable market transitions. The complexity tools - bifurcations, chaos, multiple equilibria - discussed in this book will help students, researchers and policy makers to build more realistic behavioral models with heterogeneous expectations to describe financial market movements and macro-economic fluctuations, in order to better manage crises in a complex global economy.

Download or read book The Oxford Handbook of Computational Economics and Finance written by Shu-Heng Chen and published by Oxford University Press. This book was released on 2018-01-12 with total page 785 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Oxford Handbook of Computational Economics and Finance provides a survey of both the foundations of and recent advances in the frontiers of analysis and action. It is both historically and interdisciplinarily rich and also tightly connected to the rise of digital society. It begins with the conventional view of computational economics, including recent algorithmic development in computing rational expectations, volatility, and general equilibrium. It then moves from traditional computing in economics and finance to recent developments in natural computing, including applications of nature-inspired intelligence, genetic programming, swarm intelligence, and fuzzy logic. Also examined are recent developments of network and agent-based computing in economics. How these approaches are applied is examined in chapters on such subjects as trading robots and automated markets. The last part deals with the epistemology of simulation in its trinity form with the integration of simulation, computation, and dynamics. Distinctive is the focus on natural computationalism and the examination of the implications of intelligent machines for the future of computational economics and finance. Not merely individual robots, but whole integrated systems are extending their "immigration" to the world of Homo sapiens, or symbiogenesis.