Advanced Search
MyIDEAS: Login to save this paper or follow this series

Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area

Contents:

Author Info

  • Sacht, Stephen
  • Jang, Tae-Seok

Abstract

In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid New-Keynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism - so called animal spirits - on future movements in the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides fits for auto- and cross-covariances of the Euro Area data which are slightly better than or equal to a model where rational expectations are assumed. In particular, over the whole time interval the agents had expected moderate deviations of the output gap from its steady state value with low uncertainty. We find strong evidence for an autoregressive expectation formation process regarding the inflation gap. Both observations explain a high degree of persistence in the output gap and the inflation gap. We also examine the finite sample properties of the moment-based estimator for structural and behavioral parameters via a Monte Carlo study. --

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econstor.eu/bitstream/10419/62071/1/VfS_2012_pid_792.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62071.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:zbw:vfsc12:62071

Contact details of provider:
Email:
Web page: http://www.socialpolitik.org/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Michael W.M. Roos & Ulrich Schmidt, 2011. "The importance of time series extrapolation for macroeconomic expectations," Kiel Working Papers 1723, Kiel Institute for the World Economy.
  2. Joseph G. Altonji & Lewis M. Segal, 1994. "Small sample bias in GMM estimation of covariance structures," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 94-8, Federal Reserve Bank of Chicago.
  3. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, Springer, vol. 1(2), pages 163-183, September.
  4. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, American Economic Association, vol. 93(5), pages 1449-1475, December.
  5. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  6. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(5), pages 1036-1051, May.
  7. Guido Ascari & Tiziano Ropele, 2009. "Trend inflation, Taylor principle and indeterminacy," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 708, Bank of Italy, Economic Research and International Relations Area.
  8. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, Elsevier, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  9. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  10. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
  11. Thomas Lux, 2007. "Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey," Working Papers, Warwick Business School, Finance Group wp07-11, Warwick Business School, Finance Group.
  12. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(5), pages 1123-1175, 09.
  13. Matthias Lengnick & Hans-Werner Wohltmann, 2013. "Agent-based financial markets and New Keynesian macroeconomics: a synthesis," Journal of Economic Interaction and Coordination, Springer, Springer, vol. 8(1), pages 1-32, April.
  14. Sacht, Stephen & Franke, Reiner & Jang, Tae-Seok, 2013. "Moment Matching versus Bayesian Estimation: Backward-Looking Behaviour in a New-Keynesian Baseline Model," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 79694, Verein für Socialpolitik / German Economic Association.
  15. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4750, C.E.P.R. Discussion Papers.
  16. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Interpreting euro area inflation at high and low frequencies," European Economic Review, Elsevier, Elsevier, vol. 52(6), pages 964-986, August.
  17. MOONS, Cindy & GARRETSEN, Harry & VAN AARLE, Bas & FORNERO, Jorge, 2007. "Monetary policy in the new-Keynesian model: An application to the Euro-Area," Working Papers 2007014, University of Antwerp, Faculty of Applied Economics.
  18. Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0144, National Bureau of Economic Research, Inc.
  19. David Colander & Hans Föllmer & Armin Haas & Michael Goldberg & Katarina Juselius & Alan Kirman & Thomas Lux & Brigitte Sloth, 2009. "The Financial Crisis and the Systemic Failure of Academic Economics," Kiel Working Papers 1489, Kiel Institute for the World Economy.
  20. David Goldbaum & Bruce Mizrach, 2005. "Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision," Computing in Economics and Finance 2005, Society for Computational Economics 295, Society for Computational Economics.
  21. Castelnuovo, Efrem, 2010. "Trend inflation and macroeconomic volatilities in the post-WWII U.S. economy," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 21(1), pages 19-33, March.
  22. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 586-606, June.
  23. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
  24. Shiller, Robert J., 1978. "Rational expectations and the dynamic structure of macroeconomic models : A critical review," Journal of Monetary Economics, Elsevier, Elsevier, vol. 4(1), pages 1-44, January.
  25. Carl Chiarella & Xue-Zhong He, 1999. "Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 18, Quantitative Finance Research Centre, University of Technology, Sydney.
  26. Magnus Forsells & Geoff Kenny, 2004. "Survey Expectations, Rationality and the Dynamics of Euro Area Inflation," Journal of Business Cycle Measurement and Analysis, OECD Publishing,CIRET, OECD Publishing,CIRET, vol. 2004(1), pages 13-41.
  27. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series, European Central Bank 0042, European Central Bank.
  28. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 929-52, July.
  29. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 665-690, April.
  30. Binder,M. & Pesaran,H.M., 1995. "Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9415, Faculty of Economics, University of Cambridge.
  31. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 2101-26, December.
  32. Lombardi, Marco J. & Nicoletti, Giulio, 2012. "Bayesian prior elicitation in DSGE models: Macro- vs micropriors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(2), pages 294-313.
  33. Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, Elsevier, vol. 47(2-3), pages 197-205, February.
  34. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2011. "Moment matching versus Bayesian estimation: Backward-looking behaviour in the new-Keynesian three-equations model," Economics Working Papers 2011,10, Christian-Albrechts-University of Kiel, Department of Economics.
  35. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  36. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian model: A formal test of backward- and forward-looking behavior," Economics Working Papers 2012-07, Christian-Albrechts-University of Kiel, Department of Economics.
  37. Russell, Bill & Banerjee, Anindya, 2008. "The long-run Phillips curve and non-stationary inflation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(4), pages 1792-1815, December.
  38. Paul Grauwe, 2011. "Animal spirits and monetary policy," Economic Theory, Springer, Springer, vol. 47(2), pages 423-457, June.
  39. Frank H. Westerhoff, 2008. "The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(2+3), pages 195-227, June.
  40. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Fabio Milani, 2012. "The Modeling of Expectations in Empirical DSGE Models: a Survey," Working Papers 121301, University of California-Irvine, Department of Economics.
  2. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian Model: a formal test of backward- and forward-looking expectations," MPRA Paper 40278, University Library of Munich, Germany.
  3. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian model: A formal test of backward- and forward-looking behavior," Economics Working Papers 2012-07, Christian-Albrechts-University of Kiel, Department of Economics.
  4. Jang, Tae-Seok, 2012. "Structural estimation of the New-Keynesian Model: a formal test of backward- and forward-looking expectations," MPRA Paper 39669, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc12:62071. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.