A Behavioral New Keynesian Model
By Xavier Gabaix. The American Economic Review, 2020
449 citations recorded by the source corpus.
This paper analyzes how bounded rationality affects monetary and fiscal policy via an empirically relevant enrichment of the New Keynesian model. It models agents’ partial myopia toward distant atypical events using a new microfounded “cognitive discounting” parameter. Compared to the rational model, (i) there is no forward guidance puzzle; (ii) the Taylor principle changes: with passive monetary policy but enough myopia equilibria are determinate and economies stable; (iii) the zero lower bound is much less costly; (iv) price-level targeting is not optimal; (v) fiscal stimulus is effective; (vi) the model is “ neo-Fisherian” in the long run, Keynesian in the short run. (JEL E12, E31, E43, E52, E62, E70)
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/d98e96923cf3582c58914e7ae2c4366f584ff0df
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Citations in the corpus
- The Slope of the Phillips Curve: Evidence from U.S. States (2020, background): “Recent work has shown that plausible deviations from full rationality or common knowledge yield a Phillips curve that is less forward looking (Angeletos and Lian 2018; Gabaix 2020).”
- The State of New Keynesian Economics: A Partial Assessment (2018, background): “…include the introduction of finite lives (Del Negro et al. 2015), incomplete markets with bounded rationality (Farhi and Werning 2016) or without bounded rationality (McKay et al. (2016, 2017), lack of common knowledge (Angeletos and Lian 2018), and behavioral discounting (Gabaix 2017).”
- Monetary Policy and Heterogeneity: An Analytical Framework (2018, unknown): “…rational expectations such as the reflective equilibrium considered by Garcia-Schmidt and Woodford (2015), the behavioral model with sparsity of Gabaix (2016), imperfect common knowledge as in Angeletos and Lian (2016), the combination of reflective equilibrium with incomplete markets in Farhi…”