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DSGE-Modelling: when agents are imperfectly informed

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  • De Grauwe, Paul

Abstract

DSGE-models have become important tools of analysis not only in academia but increasingly in the board rooms of central banks. The success of these models has much to do with the coherence of the intellectual framework it provides. The limitations of these models come from the fact that they make very strong assumptions about the cognitive abilities of agents in understanding the underlying model. In this paper we relax this strong assumption. We develop a stylized DSGE-model in which individuals use simple rules of thumb (heuristics) to forecast the future inflation and output gap. We compare this model with the rational expectations version of the same underlying model. We find that the dynamics predicted by the heuristic model differs from the rational expectations version in some important respects, in particular in their capacity to produce endogenous economic cycles. JEL Classification: E10, E32, D83

Suggested Citation

  • De Grauwe, Paul, 2008. "DSGE-Modelling: when agents are imperfectly informed," Working Paper Series 897, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2008897
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Baele, Lieven & Bekaert, Geert & Cho, Seonghoon & Inghelbrecht, Koen & Moreno, Antonio, 2015. "Macroeconomic regimes," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 51-71.
    2. De Grauwe, Paul & Macchiarelli, Corrado, 2015. "Animal spirits and credit cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 95-117.
    3. Lines, Marji & Westerhoff, Frank, 2010. "Inflation expectations and macroeconomic dynamics: The case of rational versus extrapolative expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 246-257, February.
    4. Chiarella, Carl & He, Xue-Zhong & Huang, Weihong & Zheng, Huanhuan, 2012. "Estimating behavioural heterogeneity under regime switching," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 446-460.
    5. Roberto Tamborini, 2010. "Monetary Policy With Investment-Saving Imbalances," Metroeconomica, Wiley Blackwell, vol. 61(3), pages 473-509, July.
    6. Annabelle Mourougane & Lukas Vogel, 2008. "Short-Term Distributional Effects of Structural Reforms: Selected Simulations in a DGSE Framework," OECD Economics Department Working Papers 648, OECD Publishing.

    More about this item

    Keywords

    animal spirits; DSGE-Model; heuristics; imperfect information;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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