Our research main aim is to build behavioral macro model sticky-price New Keynesian models where agents' beliefs are not homogeneous, but driven by some behavioral mechanisms studied in experimental economics. We consider that agents choose optimal plans considering forecasts of macroeconomic conditions. However, a least some of them (limited rational agents) use heuristics to forecast macroeconomic variables instead rational expectations. More precisely, we aim to extend the existing literature on behavioral macro New Keynesian models to inattention, time-and state dependent process, and limited horizon forecasting.
After developed, we plan to use our framework to study unconventional policies (QE and forward guidance), optimal policies (consistent with a second-order approximation of the policy objective from the consumers' utility function or with Ramsey plans), and fiscal multipliers. Our approach should be able to solve some puzzles that characterize these issues, among others the forward guidance puzzle, and to contribute on related debates (such as the optimal trend inflation or the debate on the neoclassical vs. Keynesian fiscal multipliers).
Connected to the main task, our research aims to provide soundly foundation to our approach. Foundations will be built on three lines: 1) Ex ante data evaluation to derive empirical stylized facts on price and expectation formation dynamics; at this stage, investigations will be based on existing price and expectations survey data; 2) Lab experiments on price and expectation formation by using the modern design techniques borrowed from experimental economics; 3) Model ex post evaluation, after the developments of generalized behavioral DSGE New Keynesian models, these will be estimated by Bayesian techniques and their marginal likelihoods compared to evaluate their fit abilities.
By our parsimonious behavioral macro-model, our research aims to innovate our current knowledge of the studied issue on several respects. We aim to study the extent to which the belief-formation process affects the dynamics of macroeconomic variables by a simple, small cost behavioral sophistication in an otherwise standard models. A virtue of our approach is that we remain rooted in classical economics and its powerful tools.
Our main points can be summarized as follows.
- We aim to contribute to the DSGE methodological modelling by generalizing the current prototypes of behavioral macro models to inattention, time-and state dependent process, and limited horizon forecasting.
- In developing these models, we also plan to contribute to our knowledge of the stylized facts on price and expectation formation (using price and expectations survey data) and related psychological processes (using lab experiments).
- On our knowledge of macroeconomic theory, we plan to contribute to the positive and normative issues related to QE and forward guidance (unconventional policies), optimal monetary and fiscal policies (in the contexts of both the utility second-order approximation and Ramsey plans), and debates on fiscal multipliers.
- Our approach should be able to solve some puzzles that characterize these issues (forward guidance puzzle, time varying fiscal multipliers, neoclassical vs. Keynesian effects of government consumption, optimal trend inflation). We plan to obtain soundly theoretical outcomes, by providing strong empirical evidence to them and their foundations (based on lab experiments and econometric analyses).