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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://www1.fee.uva.nl/cendef/publications/papers/m%20revision.pdf
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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
    Date of revision:
    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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    1. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenico Massaro, 2013. "Individual Expectations and Aggregate Macro Behavior," Tinbergen Institute Discussion Papers 13-016/II, Tinbergen Institute.
    2. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    3. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
    4. Cars Hommes, 2010. "The heterogeneous expectations hypothesis: some evidence from the lab," Post-Print hal-00753041, HAL.
    5. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper 2003-18, Federal Reserve Bank of Atlanta.
    6. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
    7. Adam, Klaus, 2005. "Experimental Evidence on the Persistence of Output and Inflation," CEPR Discussion Papers 4885, C.E.P.R. Discussion Papers.
    8. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
    9. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    10. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
    11. 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.
    12. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
    13. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565 - 615.
    14. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
    15. Cees Diks & Roy van der Weide, 2003. "Continuous Beliefs Dynamics," Tinbergen Institute Discussion Papers 03-007/1, Tinbergen Institute.
    16. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2008. "The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping-Generations Monetary Model," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 219-254, June.
    17. 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.
    18. 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.
    19. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
    20. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2005. "Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 955-980.
    21. Pfajfar, Damjan & Santoro, Emiliano, 2010. "Heterogeneity, learning and information stickiness in inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 426-444, September.
    22. Florian Wagener & Jan Tuinstra, 2004. "On Learning Equilibria," Computing in Economics and Finance 2004 217, Society for Computational Economics.
    23. Brock, William A. & de Fontnouvelle, Patrick, 2000. "Expectational diversity in monetary economies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 725-759, June.
    24. Diks, C.G.H. & Weide, R. van der, 2002. "Continuous Beliefs Dynamics," CeNDEF Working Papers 02-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    25. Christopher D. Carroll, 2003. "Macroeconomic Expectations of Households and Professional Forecasters," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 269-298.
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