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Dynamic predictor selection in a new Keynesian model with heterogeneous expectations

Listed author(s):
  • Branch, William A.
  • McGough, Bruce

This paper introduces dynamic predictor selection into a New Keynesian model with heterogeneous expectations and examines its implications for monetary policy. We extend Branch and McGough (2009) by incorporating endogenous time-varying predictor proportions along the lines of Brock and Hommes (1997). We find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution. The qualitative nature of the non-linear dynamics turns on the interaction between hawkishness of the government's policy and the extrapolative behavior of non-rational agents.

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

Volume (Year): 34 (2010)
Issue (Month): 8 (August)
Pages: 1492-1508

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:8:p:1492-1508
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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