Individual Expectations and Aggregate Macro Behavior

Tiziana Assenza, Peter Heemeijer, Cars Hommes and Domenico Massaro
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Peter Heemeijer: University of Amsterdam, and ABN AMRO

No 13-016/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: 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. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behavior and oscillatory convergence. We fit a heterogeneous expectations model with a performance-based evolutionary selection among heterogeneous forecasting heuristics to the experimental data. A simple heterogeneous expectations switching model fits individual learning as well as aggregate macro behavior and outperforms homogeneous expectations benchmarks. Moreover, in accordance to theoretical results in the literature on monetary policy, we find that an interest rate rule that reacts more than point for point to inflation has some stabilizing effects on inflation in our experimental economies, although convergence can be slow in presence of evolutionary learning.

Keywords: Experiments; New Keynesian Macro Model; Monetary Policy; Expectations; Heterogeneity (search for similar items in EconPapers)
JEL-codes: C91 C92 D84 E52 (search for similar items in EconPapers)
Date: 2013-01-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (74)

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Related works:
Working Paper: Individual Expectations and Aggregate Macro Behavior (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130016

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