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A flexible deviation from FIRE in the sequence space

Author

Listed:
  • Jamie Lenney

    (Bank of England)

  • Biagio Rosso

    (University of Cambridge)

Abstract

This paper proposes a flexible approach to departing from full information rational expectations (FIRE) in DSGE models using the sequence space framework. We implement a reduced-form behavioural expectations process in which agents can simultaneously overreact or underreact to current economic conditions and underreact to news, and we derive an associated behavioural expectations solver deployable to a wide class of DSGE and HANK models. The approach nests several different expectations models as special cases while remaining agnostic on the precise source of belief frictions. We apply it to a medium-scale two-asset HANK model and jointly estimate the model’s dynamic and behavioural parameters on US business cycle data, including inflation expectation data. Behavioural expectations quantitatively improve the empirical fit of the model and the qualitative properties of its impulse response functions.

Suggested Citation

  • Jamie Lenney & Biagio Rosso, 2026. "A flexible deviation from FIRE in the sequence space," Bank of England Staff Working Paper series 1197, Bank of England.
    • Handle: RePEc:boe:boeewp:023319
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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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