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Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area

Stephen Sacht and Tae-Seok Jang

VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century from Verein für Socialpolitik / German Economic Association

Abstract: In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid New-Keynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism - so called animal spirits - on future movements in the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides fits for auto- and cross-covariances of the Euro Area data which are slightly better than or equal to a model where rational expectations are assumed. In particular, over the whole time interval the agents had expected moderate deviations of the output gap from its steady state value with low uncertainty. We find strong evidence for an autoregressive expectation formation process regarding the inflation gap. Both observations explain a high degree of persistence in the output gap and the inflation gap. We also examine the finite sample properties of the moment-based estimator for structural and behavioral parameters via a Monte Carlo study.

JEL-codes: C53 D83 E12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area (2012) Downloads
Working Paper: Identification of animal spirits in a bounded rationality model: An application to the euro area (2012) Downloads
Working Paper: Identification of animal spirits in a bounded rationality model: An application to the euro area (2012) Downloads
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