Fiscal Policy Perceptions in a Behavioral New Keynesian Model

Thomas Lubik () and Massimiliano Marzo
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Thomas Lubik: Research Department, Federal Reserve Bank of Richmond

Annals of Economics and Finance, 2021, vol. 22, issue 2, 255-287

Abstract: We study misperceptions of fiscal policy in a New Keynesian model based on the imperfect cognition framework of Gabaix (2020), where agents have limited ability to forecast future macroeconomic variables. We derive three main insights. First, we document the failure of Ricardian equivalence under misperception as the main transmission channel of shocks. Second, monetary policy has a weakened impact on macroeconomic variables when compared with the full information case. Third, we propose an endogenization of the cognitive parameters as an extension to Gabaix (2020). Robustness analysis reveals how households' cognitive ability plays a dominant role in affecting the size of macroeconomic fluctuations.

Keywords: Imperfect Cognition; Euler-equation; Phillips curve; Monetary Policy; Fiscal Policy; Ricardian Equivalence; Macroeconomic Fluctuations (search for similar items in EconPapers)
JEL-codes: E12 E31 E43 E52 E62 E70 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2021:v:22:i:2:lubikmarzo

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