Learning, heterogeneity, and complexity in the New Keynesian model

Robert Calvert Jump, Cars Hommes and Paul Levine (p.levine@surrey.ac.uk)

Journal of Economic Behavior & Organization, 2019, vol. 166, issue C, 446-470

Abstract: We present a New Keynesian model in which a fraction n of agents are fully rational, and a fraction 1−n of agents are bounded rational. After deriving a simple reduced form, we demonstrate that the Taylor condition is sufficient for determinacy and stability, both when the proportion of fully rational agents is held fixed, and when it is allowed to vary according to reinforcement learning. However, this result relies on the absence of persistence in the monetary policy rule, and we demonstrate that the Taylor condition is not sufficient for determinacy and stability in the presence of interest rate smoothing. For monetary policy rules that imply indeterminacy, we demonstrate the existence of limit cycles via Hopf bifurcation, and explore a rational route to randomness numerically. Our results support the broader literature on behavioural New Keynesian models, in which the Taylor condition is known to be a useful guide to monetary policy, despite not always being sufficient for determinacy and/or stability.

Keywords: Behavioural New Keynesian model; Anticipated utility; Learning; Heterogeneous expectations (search for similar items in EconPapers)
JEL-codes: E03 E12 E32 E70 E71 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Learning, Heterogeneity, and Complexity in the New Keynesian Model (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:166:y:2019:i:c:p:446-470

DOI: 10.1016/j.jebo.2019.07.014

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