A Behavioral New Keynesian Model

Xavier Gabaix

American Economic Review, 2020, vol. 110, issue 8, 2271-2327

Abstract: This paper analyzes how bounded rationality affects monetary and fiscal policy via an empirically relevant enrichment of the New Keynesian model. It models agents' partial myopia toward distant atypical events using a new microfounded "cognitive discounting" parameter. Compared to the rational model, (i) there is no forward guidance puzzle; (ii) the Taylor principle changes: with passive monetary policy but enough myopia equilibria are determinate and economies stable; (iii) the zero lower bound is much less costly; (iv) price-level targeting is not optimal; (v) fiscal stimulus is effective; (vi) the model is "neo-Fisherian" in the long run, Keynesian in the short run.

JEL-codes: E12 E31 E43 E52 E62 E70 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (163)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aer.20162005 (application/pdf)
https://doi.org/10.3886/E117842V1 (text/html)
https://www.aeaweb.org/doi/10.1257/aer.20162005.appx (application/pdf)
https://www.aeaweb.org/doi/10.1257/aer.20162005.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: A Behavioral New Keynesian Model (2016)
Working Paper: A Behavioral New Keynesian Model (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:110:y:2020:i:8:p:2271-2327

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/aer.20162005

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().