Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. In line with the behavioral model, the results support the claim that output stabilization can lead to less volatile inflation.

Hommes, C., Massaro, D., Weber, M., Monetary policy under behavioral expectations: Theory and experiment, <<EUROPEAN ECONOMIC REVIEW>>, 2019; 118 (N/A): 193-212. [doi:10.1016/j.euroecorev.2019.05.009] [http://hdl.handle.net/10807/139326]

Monetary policy under behavioral expectations: Theory and experiment

Massaro, Domenico
Secondo
;
2019

Abstract

Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. In line with the behavioral model, the results support the claim that output stabilization can lead to less volatile inflation.
2019
Inglese
Hommes, C., Massaro, D., Weber, M., Monetary policy under behavioral expectations: Theory and experiment, <<EUROPEAN ECONOMIC REVIEW>>, 2019; 118 (N/A): 193-212. [doi:10.1016/j.euroecorev.2019.05.009] [http://hdl.handle.net/10807/139326]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/139326
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