Individual Expectations and Aggregate Macro Behavior

48 Pages Posted: 31 Oct 2011

See all articles by Tiziana Assenza

Tiziana Assenza

Catholic University of Milan; University of Amsterdam - CeNDEF

Peter Heemeijer

University of Amsterdam - Department of Quantitative Economics (KE)

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Domenico Massaro

Catholic University of Milan; University of Amsterdam - CeNDEF

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2011

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. 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

JEL Classification: C91, C92, E52

Suggested Citation

Assenza, Tiziana and Heemeijer, Peter and Hommes, Cars H. and Massaro, Domenico, Individual Expectations and Aggregate Macro Behavior (May 1, 2011). De Nederlandsche Bank Working Paper No. 298, Available at SSRN: https://ssrn.com/abstract=1951844 or http://dx.doi.org/10.2139/ssrn.1951844

Tiziana Assenza (Contact Author)

Catholic University of Milan ( email )

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

Peter Heemeijer

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Domenico Massaro

Catholic University of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
47
Abstract Views
575
PlumX Metrics