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Macroeconomic Stability and Heterogeneous Expectations

Listed author(s):
  • Nicolò Pecora

    ()

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

  • Alessandro Spelta

    ()

    (Department of Economics and Management, University of Pavia)

Registered author(s):

    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
    Handle: RePEc:pav:demwpp:037
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    1. 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.
    2. James B. Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
    3. Michael Woodford, 2009. "Convergence in Macroeconomics: Elements of the New Synthesis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 267-279, January.
    4. Hommes, C.H. & Wagener, F.O.O., 2003. "Does eductive stability imply evolutionary stability?," CeNDEF Working Papers 03-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    5. Anufriev, Mikhail & Assenza, Tiziana & Hommes, Cars & Massaro, Domenico, 2013. "Interest Rate Rules And Macroeconomic Stability Under Heterogeneous Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 17(08), pages 1574-1604, December.
    6. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    8. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    9. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    10. 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.
    11. Evans, George W. & Honkapohja, Seppo, 2002. "Monetary policy, expectations and commitment," Working Paper Series 0124, European Central Bank.
    12. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenico Massaro, 2013. "Individual Expectations and Aggregate Macro Behavior," Tinbergen Institute Discussion Papers 13-016/II, Tinbergen Institute.
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