A New Keynesian model with heterogeneous expectations
William Branch () and
Bruce McGough ()
Journal of Economic Dynamics and Control, 2009, vol. 33, issue 5, 1036-1051
Within a New Keynesian model, we incorporate bounded rationality at the individual agent level, and we determine restrictions on expectations operators sufficient to imply aggregate IS and AS relations of the same functional form as those under rationality. This result provides dual implications: the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers--imposing heterogeneous expectations at an aggregate level may be ill-advised; on the other hand, accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity. As an example, we consider a case where a fraction of agents are rational and the remainder are adaptive, and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity.
Keywords: Heterogeneous; expectations; Monetary; policy; Adaptive; learning; Aggregation (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:5:p:1036-1051
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