Individual Expectations and Aggregate Macro Behavior
Cars Hommes () and
DNB Working Papers from Netherlands Central Bank, Research Department
The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. We find that a more aggressive monetary policy that sets the interest rate more than point for point in response to inflation stabilizes inflation in our experimental economies. We use a simple model of individual learning, with a performance-based evolutionary selection among heterogeneous forecasting heuristics, to explain coordination of individual expectations and aggregate macro behavior observed in the laboratory experiments. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behaviour and oscillatory convergence. A simple heterogeneous expectations switching model fits individual learning as well as aggregate outcomes and outperforms homogeneous expectations benchmarks.
Keywords: Experiments; Monetary Policy; Expectations; Heterogeneity (search for similar items in EconPapers)
JEL-codes: C91 C92 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-evo, nep-exp, nep-mac and nep-mon
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Working Paper: Individual Expectations and Aggregate Macro Behavior (2013)
Working Paper: Individual Expectations and Aggregate Macro Behavior (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:298
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