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Heterogeneous expectations in monetary DSGE models

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  • Massaro, Domenico

Abstract

This paper derives a general New Keynesian framework with heterogeneous expectations by explicitly solving the micro-foundations underpinning the model. The resulting reduced form is analytically tractable and encompasses the representative rational agent benchmark as a special case. We specify a setup in which some agents, as a result of cognitive limitations, make mistakes when forecasting future macroeconomic variables and update their beliefs as new information becomes available, while other agents have rational expectations. We then address determinacy issues related to the use of different interest rate rules and derive policy implications for a monetary authority aiming at stabilizing the economy in a dynamic feedback system in which macroeconomic variables and heterogeneous expectations co-evolve over time.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 3 ()
Pages: 680-692

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:3:p:680-692

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Heterogeneous expectations; Monetary policy; Determinacy; Evolutionary dynamics;

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References

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Citations

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Cited by:
  1. Kurz, Mordecai & Piccillo, Giulia & Wu, Howei, 2013. "Modeling diverse expectations in an aggregated New Keynesian Model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1403-1433.
  2. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2013. "Monetary policy transmission in a model with animal spirits and house price booms and busts," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2862-2881.
  3. Orland, Andreas & Roos, Michael W.M., 2013. "The New Keynesian Phillips curve with myopic agents," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2270-2286.
  4. Pfajfar, D., 2012. "Formation of Rationally Heterogeneous Expectations," Discussion Paper 2012-083, Tilburg University, Center for Economic Research.
  5. Marcin Wolski, 2012. "Monetary policy, banking and heterogeneous agents," National Bank of Poland Working Papers 136, National Bank of Poland, Economic Institute.
  6. Assenza, T. & Brock, W.A. & Hommes, C.H., 2012. "Animal Spirits, Heterogeneous Expectations and the Amplification and Duration of Crises," CeNDEF Working Papers 12-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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