Download This PaperEstimation of heuristic switching in behavioral macroeconomic models
This is a pre-print of an article published in the Journal of Economic Dynamics and Control (2023). The final authenticated version is available online at DOI: doi.org/10.1016/j.jedc.2022.104585
29 Pages Posted: 22 Mar 2021 Last revised: 5 Mar 2023
Date Written: December 2, 2022
Abstract
This paper addresses the issue of empirical validation of macroeconomic models with behavioral heuristics and a nonlinear switching mechanism. Heuristic switching is an important feature of modeling strategy since it uses simple decision rules of boundedly rational heterogeneous agents. The simulation study shows that the proposed simulated maximum likelihood method well identifies behavioral effects that remain hidden under standard econometric approaches. In the empirical application, we estimate the structural and behavioral parameters of the US economy. We are specifically able to reliably identify the intensity of choice that governs the models' nonlinear dynamics. Our empirical results thus lay the foundation for studying monetary and fiscal policy in a behavioral macroeconomic framework.
Keywords: behavioral heuristics, heuristic switching model, intensity of choice, simulated maximum likelihood
JEL Classification: C53, E12, E32, E71
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