Estimation of heuristic switching in behavioral macroeconomic models
34 Pages Posted: 22 Mar 2021 Last revised: 24 Mar 2022
Date Written: March 24, 2022
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 identifies well the behavioral effects that stay hidden for standard econometric approaches. In the empirical application, we estimate the structural and behavioral parameters of the US economy. We are especially 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
Suggested Citation: Suggested Citation