Monetary policy under behavioral expectations: Theory and experiment

Cars Hommes, Domenico Massaro and Matthias Weber

European Economic Review, 2019, vol. 118, issue C, 193-212

Abstract: Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. In line with the behavioral model, the results support the claim that output stabilization can lead to less volatile inflation.

Keywords: Behavioral macroeconomics; Experimental macroeconomics; Heterogeneous expectations; Learning-to-forecast experiment (search for similar items in EconPapers)
JEL-codes: C92 D84 E52 E70 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Related works:
Working Paper: Monetary Policy under Behavioral Expectations: Theory and Experiment (2017)
Working Paper: Monetary Policy under Behavioral Expectations: Theory and Experiment (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:118:y:2019:i:c:p:193-212

DOI: 10.1016/j.euroecorev.2019.05.009

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