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Modeling diverse expectations in an aggregated New Keynesian Model

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  • Kurz, Mordecai
  • Piccillo, Giulia
  • Wu, Howei
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    Abstract

    We explore a New Keynesian Model with diverse beliefs and study the aggregation problems in the log-linearized economy. We show the solution of these problems depend upon the belief structure. Agents' beliefs are described by individual state variables and satisfy three Rationality Axioms, leading to the emergence of an aggregate state variable named “mean market state of belief.” In equilibrium, endogenous variables are functions of mean market belief and this state variable is the tool used to solve the aggregation problems.

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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): 8 ()
    Pages: 1403-1433

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    Handle: RePEc:eee:dyncon:v:37:y:2013:i:8:p:1403-1433

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

    Related research

    Keywords: New Keynesian Model; Heterogenous beliefs; Market state of belief; Bayesian learning; Updating beliefs; Rational beliefs; Monetary policy rule;

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    References

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    Cited by:
    1. Giulia Piccillo, 2013. "Exchange Rates and Asset Prices: Heterogeneous Agents at Work," CESifo Working Paper Series 4257, CESifo Group Munich.

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