The Modeling of Expectations in Empirical DSGE Models: a Survey

Fabio Milani

No 121301, Working Papers from University of California-Irvine, Department of Economics

Abstract: A recent notable development in the empirical macroeconomics literature has been the rapid growth of papers that build structural models, which include a number of frictions and shocks, and which are confronted with the data using sophisticated full-information econometric approaches, often using Bayesian methods. A widespread assumption in these estimated models, as in most of the macroeconomic literature in general, is that economic agents' expectations are formed according to the Rational Expectations Hypothesis (REH). Various alternative ways to model the formation of expectations have, however, emerged: some are simple refinements that maintain the REH, but change the information structure along different dimensions, while others imply more significant departures from rational expectations. I review here the modeling of the expectation formation process and discuss related econometric issues in current structural macroeconomic models. The discussion includes benchmark models assuming rational expectations, extensions based on allowing for sunspots, news, sticky information, as well as models that abandon the REH to use learning, heuristics, or subjective expectations.

Keywords: Expectations formation; DSGE models; Rational expectations; Adaptive learning; Survey expectations; New Bayesian macroeconometrics (search for similar items in EconPapers)
JEL-codes: C52 D84 E32 E50 E60 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-06
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (37)

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Chapter: The Modeling of Expectations in Empirical DSGE Models: A Survey (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:121301

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