Individual Expectations and Aggregate Macro Behavior

Tinbergen Institute Discussion Paper 13-016/II

59 Pages Posted: 15 Jan 2013 Last revised: 11 Dec 2015

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: January 5, 2013

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

JEL Classification: C91, C92, D84, E52

Suggested Citation

Assenza, Tiziana and Heemeijer, Peter and Hommes, Cars H. and Massaro, Domenico, Individual Expectations and Aggregate Macro Behavior (January 5, 2013). Tinbergen Institute Discussion Paper 13-016/II. Available at SSRN: https://ssrn.com/abstract=2200424 or http://dx.doi.org/10.2139/ssrn.2200424

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

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