Monetary policy under behavioral expectations: Theory and experiment
| Authors | |
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| Publication date | 09-2019 |
| Journal | European Economic Review |
| Volume | Issue number | 118 |
| Pages (from-to) | 193-212 |
| Number of pages | 20 |
| Organisations |
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| 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. |
| Document type | Article |
| Note | With supplementary materials |
| Language | English |
| Published at | https://doi.org/10.1016/j.euroecorev.2019.05.009 |
| Other links | https://www.scopus.com/pages/publications/85066856664 |
| Downloads |
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(Final published version)
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| Supplementary materials | |
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