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Dynamic predictor selection in a new Keynesian model with heterogeneous expectations

William Branch () and Bruce McGough ()

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 8, 1492-1508

Abstract: This paper introduces dynamic predictor selection into a New Keynesian model with heterogeneous expectations and examines its implications for monetary policy. We extend Branch and McGough (2009) by incorporating endogenous time-varying predictor proportions along the lines of Brock and Hommes (1997). We find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution. The qualitative nature of the non-linear dynamics turns on the interaction between hawkishness of the government's policy and the extrapolative behavior of non-rational agents.

Keywords: Heterogeneous; expectations; Complex; dynamics; Determinacy; Monetary; policy (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:8:p:1492-1508

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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