Behavioral New Keynesian Models: Learning vs. Cognitive Discounting

Greta Meggiorini and Fabio Milani

No 202103, Working Papers from University of California-Irvine, Department of Economics

Abstract: This paper estimates a New Keynesian model with new and old behavioral elements. Agents in the model exhibit cognitive discounting, or myopia: they discount variables far into the future at higher rates than typically implied in the benchmark model. We investigate the model under different expectational assumptions: rational expectations, subjective expectations with infinite-horizon learning, and subjective expectations with Euler-equation learning. Under rational expectations, the model necessitates of large, possibly unrealistically so, degrees of myopia. The same result persists under infinite-horizon learning, given that agents are still remarkably far-sighted. But, under Euler-equation learning, the model can fit the data with only minimal estimated degrees of myopia. The results indicate that the empirical evidence for cognitive discounting may be sensitive to the modeling of expectations, and they highlight learning as a key behavioral feature to understand macroeconomic fluctuations.

Keywords: Behavioral Macroeconomics; Cognitive Discounting; Myopia; Inattention; Constant-Gain Learning; Behavioral New Keynesian Model (search for similar items in EconPapers)
JEL-codes: C32 E32 E50 E52 E70 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2021-04
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Behavioral New Keynesian Models: Learning vs. Cognitive Discounting (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:202103

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