Behavioral Learning Equilibria in the New Keynesian Model

73 Pages Posted: 16 Sep 2019

See all articles by Cars H. Hommes

Cars H. Hommes

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

Kostas Mavromatis

De Nederlandsche Bank

Tolga Ozden

University of Amsterdam, Faculty of Economics and Business (FEB), Students

Mei Zhu

Shanghai University of Finance and Economics

Date Written: September 2, 2019

Abstract

We introduce the concept of behavioral learning equilibrium (BLE) into a high dimensional linear framework and apply it to the standard New Keynesian model. For each endogenous variable, boundedly rational agents use a simple, but optimal AR(1) forecasting rule with parameters consistent with the observed sample mean and autocorrelation of past data. The main contributions of our paper are fourfold: (1) we derive existence and stability conditions of BLE in a general linear framework, (2) we provide a general method for Bayesian likelihood estimation of BLE, (3) we estimate the baseline NK model based on U.S. data and show that the relative model fit is better under BLE than REE, (4) we analyze optimal monetary policy under BLE and show that it differs from REE. In particular, we find that the transmission channel of monetary policy is stronger under BLE at the estimated parameter values.

Keywords: Bounded Rationality, Behavioral Learning Equilibrium, Adaptive Learning, Behavioral New Keynesian Macro-Model, Monetary Policy

JEL Classification: C11, E62, E03, D83, D84

Suggested Citation

Hommes, Cars H. and Mavromatis, Kostas and Ozden, Tolga and Zhu, Mei, Behavioral Learning Equilibria in the New Keynesian Model (September 2, 2019). De Nederlandsche Bank Working Paper No. 654. Available at SSRN: https://ssrn.com/abstract=3450570 or http://dx.doi.org/10.2139/ssrn.3450570

Cars H. Hommes (Contact Author)

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

Kostas Mavromatis

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Tolga Ozden

University of Amsterdam, Faculty of Economics and Business (FEB), Students ( email )

Amsterdam
Netherlands

Mei Zhu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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