Precautionary Saving and Un-anchored Expectations

63 Pages Posted: 22 Mar 2021

See all articles by Alex Grimaud

Alex Grimaud

University of Amsterdam; Catholic University of Milan

Date Written: February 25, 2021

Abstract

This paper revisits monetary policy in a heterogeneous agent New Keynesian model where agents use an adaptive learning strategy named recursive least square learning in order to form their expectations. Due to the households' finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not necessarily anchored to the rational expectation path. Households experience different histories which has non-trivial consequences on their individual learning processes. In this model, supply shocks generate precautionary saving and possible long-lasting deflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen those effects which is in contradiction with previously established representative agent results under learning. Nonetheless, only price level targeting appears to resolve most of the problem by better anchoring long run expectations of future utility flows.

Keywords: Adaptive learning, supply shocks, heterogeneous expectations, HANK , price level targeting

JEL Classification: E25, E31, E52, E70

Suggested Citation

Grimaud, Alex, Precautionary Saving and Un-anchored Expectations (February 25, 2021). Available at SSRN: https://ssrn.com/abstract=3792920 or http://dx.doi.org/10.2139/ssrn.3792920

Alex Grimaud (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands
20123 (Fax)

HOME PAGE: http://https://www.uva.nl/en/profile/g/r/a.b.p.grimaud/a.b.p.grimaud.html

Catholic University of Milan ( email )

Largo Gemelli 1
Milan, MI Milano 20123
Italy

HOME PAGE: http://https://centridiricerca.unicatt.it/complexity-home

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