Short-term Planning, Monetary Policy, and Macroeconomic Persistence

López-Salido, J David, Christopher Gust and Edward Herbst

No 16141, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper estimates a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon (FH) model outperforms rational expectations versions of the NK model as well as other behavioral NK models. In the FH model, households and firms are forward-looking in thinking about events over their planning horizon but are backward looking regarding events beyond that point. This gives rise to substantial aggregate persistence without resorting to additional features such as habit persistence and price contracts indexed to lagged inflation.

Keywords: Finite-horizon planning; Learning; Monetary policy; New keynesian model; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 E52 E70 (search for similar items in EconPapers)
Date: 2021-05
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Related works:
Journal Article: Short-Term Planning, Monetary Policy, and Macroeconomic Persistence (2022)
Working Paper: Short-term Planning, Monetary Policy, and Macroeconomic Persistence (2020)
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