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Coexistence of equilibria in a New Keynesian model with heterogeneous beliefs

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  • Agliari, Anna
  • Pecora, Nicolò
  • Spelta, Alessandro

Abstract

The recent macroeconomic literature has been stressing the importance of considering heterogeneous expectations while addressing monetary policy. In this paper we consider a standard New Keynesian model, described by a two-dimensional nonlinear map, to analyze the bifurcation structure when agents have heterogeneous expectations and update their beliefs based on past performance. Depending on the degree of reactivity of the monetary policy to inflation and output deviations from the target equilibrium, different kind of dynamics may occur. We find that multiple equilibria and complicated dynamics, associated to codimension-2 bifurcations, may arise even if the monetary policy is set to respond more than point for point to inflation, as the Taylor principle prescribes. We show that if the monetary policy accommodates for a sufficient degree of output stabilization, complicated dynamics can be avoided and the number of coexisting equilibria reduces.

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  • Agliari, Anna & Pecora, Nicolò & Spelta, Alessandro, 2015. "Coexistence of equilibria in a New Keynesian model with heterogeneous beliefs," Chaos, Solitons & Fractals, Elsevier, vol. 79(C), pages 83-95.
    • Handle: RePEc:eee:chsofr:v:79:y:2015:i:c:p:83-95
    DOI: 10.1016/j.chaos.2015.05.016
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    Cited by:

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    2. Anna Agliari & Domenico Massaro & Nicolò Pecora & Alessandro Spelta, 2017. "Inflation Targeting, Recursive Inattentiveness, and Heterogeneous Beliefs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1587-1619, October.
    3. Pecora, Nicolò, 2018. "Analysis of 1:4 resonance in a monopoly model with memory," Chaos, Solitons & Fractals, Elsevier, vol. 110(C), pages 95-104.
    4. Pecora, Nicolò & Spelta, Alessandro, 2017. "Managing monetary policy in a New Keynesian model with many beliefs types," Economics Letters, Elsevier, vol. 150(C), pages 53-58.
    5. Argentiero, Amedeo & Bovi, Maurizio & Cerqueti, Roy, 2016. "Bayesian estimation and entropy for economic dynamic stochastic models: An exploration of overconsumption," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 143-157.
    6. Hommes, Cars & Lustenhouwer, Joep, 2019. "Managing unanchored, heterogeneous expectations and liquidity traps," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 1-16.

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