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Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach

Elton Beqiraj, Giovanni Di Bartolomeo (), Marco Di Pietro () and Carolina Serpieri ()
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Elton Beqiraj: Sapienza University of Rome

Journal of Economics, 2020, vol. 130, issue 3, No 2, 249-273

Abstract: Abstract By using Bayesian techniques, our paper investigates behavioral New-Keynesian DSGE models derived under two parsimonious alternatives to introduce heterogeneous expectations: the Euler equation and the anticipated-utility approach. First, we explore the relation between the expectation formation processes and the model determinacy for a broad range of parameterizations by using global sensitivity analysis and Monte Carlo filtering. Second, we perform model comparison to assess how much the two alternatives are consistent with macro and expectation survey data. Our main results are twofold: (1) model determinacy is strongly undermined by the presence of boundedly rational agents; (2) a behavioral model based on Euler equation approach fits the data decisively better than one based on anticipated utility.

Keywords: Monetary policy; Bounded rationality; Heterogeneous expectations (search for similar items in EconPapers)
JEL-codes: E24 E52 E58 J51 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00712-020-00697-6

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