Macroeconomic Stability and Heterogeneous Expectations

Nicolò Pecora () and Alessandro Spelta ()
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Nicolò Pecora: Department of Economics and Social Sciences, Università Cattolica del Sacro Cuore
Alessandro Spelta: Department of Economics and Management, University of Pavia

No 37, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: The late 2000s financial crisis resulted in the collapse of large financial institutions, in the bailout of banks by national governments and downturns in stock markets around the world. Such a large set of outcomes put classical economic thinking under huge pressure. The 2007 crisis made many policy makers in a state of ”shocked disbelief”, as Alan Greenspan declared. Furthermore the recent macroeconomic literature have been stressing the role of heterogeneous expectations in the formulation of monetary policy and recent laboratory experiments provided more evidence about this phenomenon. We use a simple model made by the standard aggregate demand function, the New Keynesian Phillips curve and a Taylor rule to deal with different issues, such as the stabilizing effect of different monetary policies in a system populated by heterogeneous agents. The response of the system depends on the ecology of forecasting rules, on agents sensitivity in evaluating the past performances of the predictors and on the reaction to inflation. In particular we investigate whether the policy makers can sharpen macroeconomic stability in the presence of heterogeneous expectations about future inflation and output gap and how this framework is able to reduce volatility and distortion in the whole system.

Pages: 30 pages
Date: 2013-03
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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