EconPapers    
Economics at your fingertips  
 

Monetary Policy under Behavioral Expectations: Theory and Experiment

Cars Hommes (), Domenico Massaro and Matthias Weber

No 42, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.

Keywords: Experimental macroeconomics; Heterogeneous expectations; LtFE; Tradeoff inflation and output gap (search for similar items in EconPapers)
JEL-codes: C90 E03 E52 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-dge, nep-exp, nep-mac and nep-mon
Date: 2017-03-30
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
https://www.lb.lt/en/publications/no-42-monetary-p ... heory-and-experiment Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 301 [REDIRECT LOOP] Moved Permanently (https://www.lb.lt/en/publications/no-42-monetary-policy-under-behavioral-expectations-theory-and-experiment [302 Found]--> http://www.lb.lt/ [301 Moved Permanently]--> https://www.lb.lt/ [302 Found]--> http://www.lb.lt/ [301 Moved Permanently]--> https://www.lb.lt/ [302 Found]--> http://www.lb.lt/ [301 Moved Permanently]--> https://www.lb.lt/ [302 Found]--> http://www.lb.lt/)

Related works:
Working Paper: Monetary Policy under Behavioral Expectations: Theory and Experiment (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lie:wpaper:42

Access Statistics for this paper

More papers in Bank of Lithuania Working Paper Series from Bank of Lithuania Bank of Lithuania Gedimino pr. 6, LT-01103 Vilnius, Lithuania. Contact information at EDIRC.
Bibliographic data for series maintained by Povilas Lastauskas ().

 
Page updated 2018-08-16
Handle: RePEc:lie:wpaper:42