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Macroeconomic Stability and Heterogeneous Expectations

  • Nicolò Pecora

    ()

    (Department of Economics and Social Sciences, Università Cattolica del Sacro Cuore)

  • Alessandro Spelta

    ()

    (Department of Economics and Management, University of Pavia)

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    The late 2000s financial crisis resulted in the collapse of large financial institutions, in the bailout of banks by national governments and downturns in stock markets around the world. Such a large set of outcomes put classical economic thinking under huge pressure. The 2007 crisis made many policy makers in a state of ”shocked disbelief”, as Alan Greenspan declared. Furthermore the recent macroeconomic literature have been stressing the role of heterogeneous expectations in the formulation of monetary policy and recent laboratory experiments provided more evidence about this phenomenon. We use a simple model made by the standard aggregate demand function, the New Keynesian Phillips curve and a Taylor rule to deal with different issues, such as the stabilizing effect of different monetary policies in a system populated by heterogeneous agents. The response of the system depends on the ecology of forecasting rules, on agents sensitivity in evaluating the past performances of the predictors and on the reaction to inflation. In particular we investigate whether the policy makers can sharpen macroeconomic stability in the presence of heterogeneous expectations about future inflation and output gap and how this framework is able to reduce volatility and distortion in the whole system.

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    File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0037.pdf
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    Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 037.

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    Length: 30 pages
    Date of creation: Mar 2013
    Date of revision:
    Handle: RePEc:pav:demwpp:037
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    1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    2. James B. Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
    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. 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.
    5. George W. Evans & Seppo Honkapohja, 2002. "Monetary Policy, Expectations and Commitment," University of Oregon Economics Department Working Papers 2002-11, University of Oregon Economics Department, revised 01 Feb 2004.
    6. M. Woodford., 2010. "Convergence in Macroeconomics: Elements of the New Synthesis," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 10.
    7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    8. Matthias Lengnick & Hans-Werner Wohltmann, 2013. "Agent-based financial markets and New Keynesian macroeconomics: a synthesis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 1-32, April.
    9. Cars Hommes, 2010. "The heterogeneous expectations hypothesis: some evidence from the lab," Post-Print hal-00753041, HAL.
    10. Hommes, Cars & Wagener, Florian, 2010. "Does eductive stability imply evolutionary stability?," Journal of Economic Behavior & Organization, Elsevier, vol. 75(1), pages 25-39, July.
    11. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenico Massaro, 2013. "Individual Expectations and Aggregate Macro Behavior," Tinbergen Institute Discussion Papers 13-016/II, Tinbergen Institute.
    12. 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.
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