Monetary policy under behavioral expectations: Theory and experiment

Open Access
Authors
Publication date 09-2019
Journal European Economic Review
Volume | Issue number 118
Pages (from-to) 193-212
Number of pages 20
Organisations
  • Faculty of Economics and Business (FEB) - Amsterdam School of Economics Research Institute (ASE-RI)
  • Faculty of Economics and Business (FEB)
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
1-s2.0-S0014292119300960-main (Final published version)
Supplementary materials
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