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Dynamic predictor selection in a new Keynesian model with heterogeneous expectations

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  • Branch, William A.
  • McGough, Bruce

Abstract

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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  • Branch, William A. & McGough, Bruce, 2010. "Dynamic predictor selection in a new Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1492-1508, August.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:8:p:1492-1508
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