TY - JOUR
T1 - Monetary policy under behavioral expectations: Theory and experiment
AU - Hommes, Cars
AU - Massaro, Domenico
AU - Weber, Matthias
PY - 2019
Y1 - 2019
N2 - 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.
AB - 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.
KW - Behavioral macroeconomics
KW - Experimental macroeconomics
KW - Heterogeneous expectations
KW - Learning-to-forecast experiment
KW - Behavioral macroeconomics
KW - Experimental macroeconomics
KW - Heterogeneous expectations
KW - Learning-to-forecast experiment
UR - http://hdl.handle.net/10807/139326
UR - http://www.elsevier.com/inca/publications/store/5/0/5/5/4/1/index.htt
U2 - 10.1016/j.euroecorev.2019.05.009
DO - 10.1016/j.euroecorev.2019.05.009
M3 - Article
SN - 0014-2921
VL - 118
SP - 193
EP - 212
JO - European Economic Review
JF - European Economic Review
ER -