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Regime shifts: early warnings

  • Massaro, D.

    ()

    (University of Amsterdam)

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    This paper derives a general New Keynesian framework consistent with heterogeneous expectations by explicitly solving the micro-foundations underpinning the model. The resulting reduced form is analytically tractable and encompasses the representative rational agent benchmark as a special case. We specify a setup in which some agents, as a result of cognitive limitations, make mistakes when forecasting future macroeconomic variables and update their beliefs as new information becomes available, while other agents have rational expectations. We then address determinacy issues related to the use of different interest rate rules and derive policy implications for a monetary authority aiming at stabilizing the economy in a dynamic feedback system in which macroeconomic variables and heterogeneous expectations co-evolve over time.

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    File URL: http://cendef.uva.nl/binaries/content/assets/subsites/amsterdam-school-of-economics-research-institute/cendef/working-papers-2012/heterogenous-m-revision.pdf?1363339495384
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    Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 12-02.

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    Date of creation: 2012
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    Handle: RePEc:ams:ndfwpp:12-02
    Contact details of provider: Postal:
    Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands

    Phone: + 31 20 525 52 58
    Fax: + 31 20 525 52 83
    Web page: http://www.fee.uva.nl/cendef/
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    7. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England.
    8. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
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    10. William A. Brock & Patrick de Fontnouvelle, 1996. "Expectational Diversity in Monetary Economies," Working Papers 96-11-084, Santa Fe Institute.
    11. Cees Diks & Roy van der Weide, 2003. "Continuous Beliefs Dynamics," Tinbergen Institute Discussion Papers 03-007/1, Tinbergen Institute.
    12. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    13. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    14. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December.
    15. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565 - 615.
    16. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenico Massaro, 2013. "Individual Expectations and Aggregate Macro Behavior," Tinbergen Institute Discussion Papers 13-016/II, Tinbergen Institute.
    17. Cars Hommes, 2010. "The heterogeneous expectations hypothesis: some evidence from the lab," Post-Print hal-00753041, HAL.
    18. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
    19. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
    20. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
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    22. Mikhail Anufriev & Tiziana Assenza & Cars Hommes & Domenico Massaro, 0000. "Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations," Tinbergen Institute Discussion Papers 09-040/1, Tinbergen Institute.
    23. Jan Tuinstra & Florian Wagener, 2007. "On learning equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(3), pages 493-513, March.
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