American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model
American Economic Journal: Macroeconomics
(pp. 188–226)
Abstract
I consider a New Keynesian framework where agents combine mis-specified forecasts and myopia to form expectations. This combination is consistent with inflation forecasts' late overshooting, underreaction to forecast revisions, and overreaction to current inflation. Estimating the general equilibrium model on macroeconomic data shows that: (i) data favor combining autoregressive mis-specified forecasting rules with myopia over other alternatives; (ii) learning of mis-specified rules improves model fit; and (iii) mis-specified forecasts generate substantial internal persistence and amplification to exogenous shocks. Inflation expectations simulated from the best-fitting model closely match survey data, providing external validation for the proposed expectations formation process.Citation
Hajdini, Ina. 2026. "Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model." American Economic Journal: Macroeconomics 18 (2): 188–226. DOI: 10.1257/mac.20230054Additional Materials
JEL Classification
- D84 Expectations; Speculations
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E17 General Aggregative Models: Forecasting and Simulation: Models and Applications
- E21 Macroeconomics: Consumption; Saving; Wealth
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation
- E37 Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications