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Estimation of heuristic switching in behavioral macroeconomic models

Jiri Kukacka and Stephen Sacht

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

Abstract: This paper addresses the issue of empirical validation of macroeconomic models with behavioral heuristics and a nonlinear switching mechanism. Heuristic switching is an important feature of modeling strategy since it uses simple decision rules of boundedly rational heterogeneous agents. The simulation study shows that the proposed simulated maximum likelihood method well identifies behavioral effects that remain hidden under standard econometric approaches. In the empirical application, we estimate the structural and behavioral parameters of the US economy. We are specifically able to reliably identify the intensity of choice that governs the models’ nonlinear dynamics. Our empirical results thus lay the foundation for studying monetary and fiscal policy in a behavioral macroeconomic framework.

Keywords: Behavioral heuristics; Heuristic switching model; Intensity of choice; Simulated maximum likelihood (search for similar items in EconPapers)
JEL-codes: C53 E12 E32 E71 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.jedc.2022.104585

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